The share market is full of uncertainty. A big concern of shareholders is share price fluctuation which depends on various aspects of the market.
Sometimes, the share prices are so high, and sometimes, they get so low which leads to huge financial losses. Now, as an investor, you might wonder, why the share prices experience so many ups and down.
People who are just interested in the field and want to gain their capital by investing it in the market, surely be interestedly unknowing why share prices get up or down. Because you just take the right decision of buying or selling the shares and you face the profit or loss.
How would it be if you can predict the share prices will go up and down?
Well, we are not talking about any supernatural powers. Instead, in this article, we will be talking about some factors that fluctuate share prices and if you read the article attentively, you can predict whether your share prices will rise or go down.
But before we go to the factors, it’s important to understand,
What is the stock price actually?
A company when starting a business, if its business goes up, requires funds or investments for its company. That’s the reason, they ask for funds from private organizations. Many other companies list their IPO on the share market. They sell the shares of their company at a specific price.
According to the company’s growth and other aspects, they value their share price. Once it was listed, the price then fluctuated. The stock price is the latest price of that company’s shares.
These share prices determined the valuation of the company. You may have noticed companies such as Amazon, State Bank Of India, or any other big companies have much higher stock prices compared to other companies which are comparatively new on the market and have less market capitalization.
However, the stock prices are not constant anyway.
As you know what stock price is, another point that people often misinterpret is, stock value and stock price. So, this matter also should be clarified.
Stock price vs stock value:
Many people at first get confused about stock price and stock value. The stock price is simply the money you invest to buy a sharer. But the stock value is a totally different thing. There is a simple math to evaluate the stock value of the company.
To get the real stock value, we have to calculate how much money a company is making per share and the price-to-earnings ratio.
If you have the total earnings of the company, you need to simply divide it by its per-share earnings. The ratio is denoted as P/E.
Here, P is the share price and
E is earnings per share.
Now, if any company’s P: E ratio is high compared to the industry, its stock prices are considered overvalued. On the other hand, if the ratio is low compared to the industry, that means its stocks are undervalued.
Let’s understand that matter practically. If any company is offering its shares at $12 each that does not mean the company has a low valuation and if the company has a very high share price that does not mean it has a high valuation either. So, you just need to simply calculate the ratio to get the valuation of that company correctly.
Depending on the business model and other circumstances, the prices go up and down. Now, if you can buy the price at its low you have a great opportunity to generate higher revenue. On the other hand, you can sell your shares then it gets down, you can skip the financial losses. Below we are mentioning some factors that are behind the share price rise and fall.
Supply and demand:
The basic principle of economics applies to the stock market as well. When there are more buyers than sellers, the share price goes up. When there are more sellers than buyers, the share price goes down.
Each company lists a fixed number or percentage of shares on trading. That means if a company parks 1000 shares to the market, individual buyers have that number of shares. Now, if there are more buyers available, the pricing will be higher. Even if the company lists its shares for $5 each and people are eagerly looking to buy the shares, the pricing would be high. As the demand rises, so rises the share prices.
If the company has good growth, and the future is aspiring for the company, who would not like to buy their shares? As the company is in good condition, by the time the share value will grow too the company grows.
Any bad news about the company:
Reputation plays a major role in a company’s share prices. Any bad news about a company that just surfaced will decrease the share price of the company. There are so many examples available on the market. A sudden bad news that impacts any company’s mage sinks the share price of that company.
Dismissal or appointment of key position holders:
Each company has its management and they mostly decide the company’s position by taking vital decisions. When a company hires or fires any key position holders, it increases or decreases the share price of the company.
Ex-Microsoft CEO Steve Ballmer, when stepped down from the position of CEO, and the share prices of the company increased. Shareholders, when they see someone who has the potential to grow the company, they trust the company more and so the share prices get high. On the other hand, if a company hires bad management, the share prices must go down as the investors do not have trust in them.
Economic condition:
Economic conditions are also a major factor in share prices. If a country’s financial condition is not going well, the share prices of the company won’t rise. A company to which it belongs does its best business in its own country. So, if the country is going through a tough time the company might not perform well. Assuming that fact, buyers don’t show much belief and the share prices don’t go up. On the other hand, if a country has a stronger economy, investors get assurance and trust.
Political crisis:
If any country’s government is not stable, or it faces a sudden political crisis, the share prices go down. A country runs through the policies that are set by the government. Now, with a political crisis, investors see a risk to their funds. Share prices of companies much higher who are in a much more stable government compared to those who aren’t.
Besides the government, geopolitics is also a major aspect. Geopolitical tensions between nations are also responsible for not gearing up the share price.
Natural disasters:
Situations like, floods, or earth quick, or droughts, also impact the share prices of a company. These types of natural disasters widely impact the population and the company does not stay untouched by them. Many companies are directly affected by these natural disasters. Especially if the company is from the food sector, it affects the supply chain and the company can’t remain in good condition.
Market sentiment:
The overall mood and attitude of the investors and traders can also affect the share price. When the market is optimistic and confident, the share price tends to rise. When the market is pessimistic and fearful, the share price tends to fall. Market sentiment can be influenced by macroeconomic factors, such as interest rates, inflation, GDP growth, etc.
New product or service launch of the company:
A company when making an announcement to launch any new product or service, that sounds interesting, sees a price hike in their shares. A new product or service means the company is making more opportunities for revenue generation. That attracts more and more investors.
Besides, announcements of a company the acquisition of other companies, or doing something new positively affect the share prices. Besides any negative announcements such as shutting down their operations, or shrinking the business decreases the share prices.
Revenue generation:
The financial and operational performance of a company can also affect its share price. When a company reports strong earnings, revenue, profit margin, cash flow, etc., the share price usually goes up. When a company reports weak earnings, revenue, profit margin, cash flow, etc. In these situations, the share price usually goes down.
If a company is failing to generate a substantial amount of revenue for a long time, the prices of the company will go down eventually. Everyone invests their money somewhere, for higher returns. Now, if a company is not making any money for a long period, investors start to pull back their funds. In that situation, the company loses its share prices. Additionally, company performance can also be affected by industry trends, competitive advantages, innovation, etc.
Dividends:
A dividend is a payment made by a company to its shareholders from its profits. When a company pays a dividend, it reduces its retained earnings and its share price accordingly. However, dividends also signal that a company is profitable and stable, and can attract more investors who are looking for income. Therefore, dividends can have both positive and negative effects on the share price.
Now as you know all the reasons behind the share price fluctuations, now it is equally important to know, as an investor, what you should do when you encounter such scenarios. If the share price goes up, then there is no need to worry about it because it increases your wealth. But what if the share price sinks? The next portion is about this.
What to do when the share price drops?
As you already have read the article, you know that share prices can fluctuate for various reasons, such as company performance, economic conditions, industry trends, market sentiment, and so on. Sometimes, these fluctuations can be significant and cause anxiety or panic among investors.
So, what should you do when your share price fluctuates?
Don’t get panic:
First of all, You need to keep calm. Share price fluctuations are normal and inevitable in the stock market no matter which stock exchange you choose to invest in. They reflect the changing expectations and opinions of buyers and sellers. Unless there is a major event or news that affects the fundamentals of the company or the industry, most fluctuations are temporary and do not indicate a long-term trend. Therefore, it is important to keep calm and avoid making hasty decisions based on emotions. Becoming panicky may lead you to take wrong decisions.
Again review your investment goals and strategy:
Secondly, you need to check your investment goals and strategies again when the share price fluctuates.
You need to check,
- Why did you buy the shares in the first place?
- What is your time horizon and risk tolerance?
- How does the share price fluctuation affect your portfolio performance and diversification?
If you have a clear and realistic investment plan, you should stick to it and not let short-term fluctuations distract you from your long-term objectives. However, if your circumstances or preferences have changed, you may need to adjust your plan accordingly. That’s totally up to your plan.
Do your research and analysis again:
Before you decide to buy or sell any shares, you should always do your homework and understand the fundamentals of the company and the industry. In new circumstances, you may find new opportunities too, diversifying your portfolio. When you are about to do the research, look at the below factors.
- What are the strengths and weaknesses of the company?
- How does it compare to its competitors?
- What are the opportunities and threats in the market?
- How does the company generate revenue and profit?
- How does it cope with challenges and uncertainties?
Look for professional advice if needed:
Lastly, seek professional advice if needed. Investing in the stock market can be complex and challenging, especially for beginners or inexperienced investors. If you are not confident or comfortable with making your own investment decisions, you may benefit from seeking professional advice from a qualified financial planner or adviser. They can help you assess your financial situation, goals, and risk profile, and recommend suitable investment products and strategies for you.
Conclusion:
If you are buying stocks from reputed stock exchanges, chances are low of being misled by the stock prices. But, still, there are many unfair companies that manipulate their stock prices. That means, their share prices are overpriced. Evaluating the real stock price is one of the basic fundamentals and a very crucial task to perform before you buy any stock. As an investor, you need to keep an eye on every possible aspect to gain huge profits and skip the losses. However, remember that ultimately, you are responsible for your own investment decisions and outcomes.
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