What influences a company’s share price

Ever noticed when the stock market crashes or corrects itself, it does so quickly and sharply? This is fear at work. When the market is positive and moves up, this is greed at work. The market always moves down quicker than it moves up, therefore we can deduce that fear is a stronger emotion than greed. This can also be interpreted in financial terms such as bullish and bearish, where the term bullish or bullish market means the market is positive and rising while bearish or bearish market refers to the stock market going southwards.

At a basic level, a stock is the initial capital that a company has. When a company goes public (meaning that the ownership of the company shifts from a closed and private group of individuals to whoever wishes to buy a share in the company), it splits this capital into units called shares and auctions the shares off. Share prices are determined by a company’s existing assets valuation (the value of the stock that the company already has) and expected long-term profits.

Below are some key indicators that influence a company’s stocks on the stock market.

Supply and demand

Share prices react to supply (selling a share) and demand (purchasing a share). An increase in demand means an increase in price, unless supply increases to match it. This is referred to as equilibrium. If an increase in demand is accompanied by a decrease in supply, the rate of price rise increases. Supply and demand are usually caused by the market makers at the exchange and the large institutions. Unfortunately, the average retail trader (even when combined) do not have enough klout to move the price of a stock that will make the markets take notice. Rather, it is the chunk of orders coming from institutional traders that moves the market and creates supply and demand deficits.

Market reactions

Every publicly listed company releases quarterly profits to its share holders. Wall Street analysts sift over the company’s quarterly reports and listen in on company conference calls to come up with quarterly profit estimates. These estimates are what analysts refer to when they say that ““Company XYZ has beaten Wall Street expectations.” When large companies for the general economy, such as IBM or GE, produce disappointing results it is generally bad for the entire market. It must be noted that a company can report bad earnings, yet its stock can go up if it beats analyst expectations. This is part of the game that surrounds corporate earnings. The market reacts more to expectations than reality.

If a company’s results surprise (are better than expected) even if it’s in the positive or negative, the price jumps up. If a company’ results disappoint (are worse than expected), then the price will fall.

Fundamental Analysis

The most direct influence on a stock’s price is a change in the economic fundamentals of the business. If a company’s revenue and profits are on a steep rise with no indication of correcting itself, you can expect to see the stock price rise even higher as investors bid to purchase shares of such companies. Conversly if a company’s stock prices continue a downward trend, it triggers massive sell offs as investors tend to put a stop on their losses. Changes in the underlying business impacts directly on the stock’s price. Even subtle changes such as increased debt, a poor acquisition and so on can also trigger price change.

Some of the indicators to look out for are:

  • Yearly performance
  • Growth
  • Leverage
  • Earnings
  • Dividends
  • Company size
  • Earnings changes
  • Market sensitivity
  • Monthly performance
  • Volatility

If you recognize and understand these stock price factors, it will help you decide whether the price movement is a buy, sell or sit tight signal. Some of the things that can be stock price factors are business dynamics, market sector variations and market changes. Share prices are also affected by the wider environment. In conclusion, bear the following factors in mind:

If economic conditions are good and expected to continue that way, investors tend to feel confident. Companies are more likely to perform well and deliver strong profits when the economic climate is benign so they are more likely to pay rising dividends. Under such circumstances, demand for shares tends to rise and prices increase;

If the economic climate is difficult however, investors may feel nervous. They may worry that a company’s profitability will suffer if economic conditions are difficult. Fears about future profits tend to reduce demand for shares so prices may fall.

Liquidity

Liquidity is an important yet often under appreciated factor. Liquidity is the ability to convert an asset to cash quickly. Also known as “marketability.” If a company’s shares are rarely traded, even just one active buyer or seller can decisively  influence the share price in the short term. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold, are known as liquid assets. Blue chip shares are usually highly liquid and therefore more responsive to material news. Large-cap shares have high liquidity: they are well followed and heavily transacted. Many small-cap shares suffer from an almost permanent “liquidity discount” because they simply are not on investors’ radar

Non-liquid shares are usually more volatile in price than liquid shares. Trading volume is another term used for liquidity. But it is also a function of corporate communications (that is, the degree to which the company is getting attention from the investor community).

Industry Outlook

Every company is categorized into it’s respective industry based on the nature of operation. Think of it such as blue chip companies (Intel, Microsoft) or manufacturing companies and so on. The general industry outlook also plays a role in a company’s stock price. Some sectors or industries are cyclical in nature and you should know that would affect price.

Below are a list of cyclical stocks. These stocks cover the remaining sectors and they typically move according to a variety of market conditions. They do move independently, however, as one may be going up while another is going down.

  • Basic Materials
  • Capital Goods
  • Communication
  • Consumer Cyclical
  • Energy
  • Financial
  • Health Care
  • Technology
  • Transportation

Even if a particular company in a sector or industry is doing well, if the overall industry outlook is negative, it has a tendency to reduce the company’s stock price. Yet again, if the industry outlook is positive, it can impact a company’s stock price and inflate it despite the company posting bad results.

A change in the industry sector is quite often, temporary. While most long-term investors will ride out the dips due to these factors if something drastically changes in the industry due to a  new set of regulation or a new technology, for example, investors may want to re-evaluate their position. Is the company in question capable of adapting to the new trends or is the company too old fashioned?

Regulatory announcements

Publicly listed companies are obliged to notify any event that could influence their share price, such as a takeover bid or the launch of a new product. These are known as regulatory announcements and they must be made via a regulatory channel known as an approved RIS (Regulatory Information Service) before the information is published anywhere else.

Information includes insider trading activity, SEC filings and so on, which are easily accessible to the retail trader which can give a wealth of information.