What determines share prices?

A mix of factors can affect a change in stock prices – be it changes in a company’s earnings to how investors perceive the stock market, for that matter. Broadly, the factors can be categorized into two types: economic factors and others (including company-related news, industry performance and investor sentiments).Here’s taking a better look at all the possible factors that can force the prices of shares to rise or fall:

1. Interest rates During a low interest rate regime, the demand for funds rises, thereby generating a greater demand for shares in the process. On the other hand, interest rates on the higher side result in reduced demand for funds. This automatically leads to a fall in demand for shares, and in the process, a dip in prices as well.
2. Probable economic outlook Should the general perception be that the economy might expand, chances are stock prices will go up. That is because investors, anticipating high future prices, would end up buying stocks in bulk in the present. Should the outlook not be adequately encouraging, chances are that investors would occupy a short position; that is, start selling the shares at maximum profit levels possible and exit the market.
3. Periods of inflation Inflation – marked by higher consumer prices – leads to customers keeping off purchases – something that results in slower sales and subsequently, reduced profit margins. Moreover, inflation often warrants an increase in rates of interest to stem excessive borrowing. These changes are likely to bring down prices of shares in the market.
4. Periods of depression Consumer prices on the wane translate to reduced profit margins for companies and an overall slowdown in economic activities. With a dip in stock prices, chances are investors would sell securities in order to make possible profits, exit the market and make a move to other fixed-income instruments, bonds for instance.
5. Prevalent political and economic climate What happens around the world – across both economic and political realms – has an impact on share prices. Political developments, including global relations and government policy decisions, go a long way in shaping up investor sentiments and confidence, and eventually, potential stock prices.

Case in point, any increase in energy costs might automatically result in reduced sales, thereby eroding profit margins – something that ultimately has a bearing on stock prices. Similarly, an act of terrorism induces negative investor sentiments and spawns a lack of confidence, thereby subsequently effecting a dip in prices of stocks.

• Dividends, if announced
• News releases on profit margins, current earnings and future projections
• Large-scale layoffs
• New and successful product launches
• Change of management
• Projected merger, takeover or acquisition

1. Company related news Some company-specific determinants that can influence stock prices include:
2. Industry performance and related news Performance of companies within the same industry is an important determinant of stock prices; that’s because chances are share prices of such companies would often move in tandem and exhibit similar trends. The crux of the phenomenon is that market conditions would affect companies much in the same way, should they all belong to a specific industry.
3. Investor confidence and sentiments

Rising investor confidence and positive sentiments can lead the stock market to move up. This, in the process, affects stock prices as well.In conclusion, company-related news, investor confidence, industry performance and economic considerations precipitate movements in stock prices.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.