Understanding How Share Price Increases Or Decreases: The stock market never stays still. Market indexes tend to see gains and losses on a daily basis. For e.g., we have seen Sensex or NIFTY gaining ~1% in a day.
Then there are times when Sensex and NIFTY fall by ~0.5%. Therefore, from time to time, the market experiences dynamic price changes. This phenomenon is known as “volatility.”
Even though people believe that high volatility can be alarming, it’s all but inevitable in the long run. Market volatility refers to the frequency and magnitude of price movements.
The bigger and more frequent price swings will be, the more volatile will the market be. Experts believe that market volatility is a normal part of investing and investments are required to be made after paying attention to such market changes.
There can be some stocks that are more volatile in comparison to others. Stock prices of blue-chip companies are not expected to make big price swings, while prices of tech companies may do so often.
Simply put, the blue-chip stock will be considered to have low volatility, and tech stock will be tagged as the one with high volatility. However, medium volatility can be referred to as somewhere in between.
Individual stocks are expected to be more volatile around key events. Do you know how share price increase or decrease? What are the primary forces which cause a particular share price to rise or fall?
In this article, we will understand how share price increases or decreases. Read on to explore!
Fluctuations In The Stock Prices
Stock market prices tend to get impacted by demand-supply economics. If the demand for stock outpaces its supply, there will be a rise in the stock price.
For example, if traders are continuously buying stock X, its price per share is expected to increase and the same is true vice-versa. When stock market experts point to market risks, they refer to this falling and rising demand and supply.
Therefore, in the stock market, like any other market, product prices are ascertained by the demand and supply of that product. Understanding and applying the mechanics of supply and demand are easy.
However, it is difficult to comprehend and monitor what makes people like one stock and dislike another one. Thus, it comes down to figuring out which set of news is positive for a company and which set is negative.
Every investor has his/her ideas and strategies. How share price increases or decreases depends on factors including company-related factors, industry dynamics, market dynamics, economic factors, etc. Let’s have a quick look at some of these.
1. Company-Related Factors
Since owning a share means owning a part of that company, any sort of positive or negative company-related news can impact stock price.
Such news can include announcements about financial performance or predicted future earnings, news and updates related to dividends, rights, or bonus issues, launching a new product or recalling of the same, news related to the tie-up or merger, or takeover, etc.
As the list goes on, these are some common company-related factors that can impact the movement in share prices.
2. Industry Dynamics
Industry dynamics can turn out to be positive or negative for the share prices of all the companies which are operating in an industry. If there is a general decline in the industry, the share prices of all the companies operating directly or indirectly in that industry will be impacted.
For e.g., when COVID-19 was at its peak, lockdowns and restrictions on international travel impacted all the companies present in the aviation and hospitality sectors.
3. Market Dynamics
There are two terms that have been used several times in the stock market – Bull phase and Bear phase. In the Bull phase, investors feel that the stock market will perform well in the long term.
This can be because of a variety of reasons including higher government support, increased foreign inflows, supportive RBI policies, etc.
In the Bear market, investors believe that stock will go down and they don’t have much confidence about the future performance of the share market.
Such a situation can arise due to a variety of factors including unfavourable inflation data, higher unemployment, etc.
4. Overvaluation And Undervaluation
Undervalued shares can become worthless if the company publishes some bad news which can result in people dumping that particular stock.
Some experts watch for moments of undervaluation and try to enter a position because they make a calculated guess that the stock will perform better shortly which can improve its demand.
If this continues for a long period of time, the stock will reach a point where it becomes overvalued. Most of the experts will now sell their investment holdings in such stocks.
As a result, supply increases, and demand decreases. This will pull the stock prices down.
Liquidity is another factor that tends to impact the movement in stock prices. This is an important and under-appreciated factor. In simple terms, this refers to how much interest from investors is being attracted to a specific stock.
For e.g. stock of a blue-chip company is highly liquid and is much more responsive to material news. On the contrary, stocks of small-cap companies are less liquid. However, volume is not the only proxy for liquidity.
Corporate communication plays a significant role too. For e.g., large-cap stocks have high liquidity as they are well-followed and such stocks are heavily transacted.
To Sum Up
Therefore, how share price increases or decreases depends upon several factors. While some factors are more relevant than others, the underlying concept remains the same. At the most fundamental level, supply-demand mechanics plays a critical role.
Theoretically, earnings affect investors’ valuation of a particular company. However, there are other indicators that investors use to analyze and monitor stock prices.
Remember, investors’ sentiments, attitudes, expectations, and performance of the company all ultimately cause share prices to increase or decrease.
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