What Affects Share Price?
Understanding why stocks go up and down is key to your chances of success as a stock trader. In our market guide, read up on what affects share prices to help to shape your analysis, guide your predictions and reduce risk.
It's impossible to predict exactly how any stock will perform, of course, but you can study influences on share prices. Learn how pricing works and what factors are worth monitoring below:
How are stock prices determined?
Share price is determined in two stages, starting with an initial public offering (IPO). Private companies launch IPOs when looking to raise capital, offering shares to the public in exchange for partial ownership. In theory, these investors can then resell their share to make a profit once a company has grown and increased in value.
Companies preparing for an IPO use a third party - typically an investment bank - to do several things including:
- Objectively value their company based on financial performance, assets, leadership experience and sales skills, plus the value of comparable stocks
- Recommend how many shares they should offer and at what price, judging likely investor demand
- Set a date for the IPO
Buying initial shares is usually reserved for major investors connected through large banks and financial services firms. This is what's known as the primary market.
Once complete, company shares become available to the public on stock exchanges. This creates a secondary market as share owners begin selling to common investors. The buy-and-sell process can then continue indefinitely.
What affects share price in secondary markets?
So what drives stock prices up and down once regular traders begin making moves? You might expect the answer to be a more complex one but, once stocks are available to trade on exchanges, pricing is driven primarily by supply and demand. Here's how it works:
- If there are more buyers than sellers for a stock, then demand is high and supply is low, and stock price will increase.
- If there are more sellers than buyers for a stock, then supply is high and demand is low, and stock price will fall.
A new market price is set each time that a buyer and seller exchange money for share ownership. This dynamic is what decides a stock's worth, even if important factors such as company performance suggest that it should be valued differently. These factors are ultimately mere drivers of supply and demand in the market.
Looking to gauge fluctuations in supply and demand and subsequently pricing? Here are the most important influences on share prices to monitor.
Company news
There are various indicators and announcements that can paint a picture of a public company's health and influence demand for shares.
Earnings reports are among the most important. These reports are typically released on a quarterly basis and include data on sales and how much profit a company has generated. If the figures exceed or fall short of expectations, then traders will react accordingly.
Other announcements to look out for include leadership changes, such as the departure or arrival of key figures. New product launches and news stories affecting public perception also play their part.
Competitor performance
Similarly, the fate of competitors new and old can impact demand for a company stock.
Stocks tend to perform in line with their wider sector, so any change in one company's prospects - whether positive or negative - can affect others by association. Such changes could be linked to any of the announcements that we covered in the section above. For example, one high-performing tech company could inadvertently boost the value of similar providers.
This isn't always the case, however. Individual companies can still buck the trend if their performance or perception is unique in their sector.
Economic health
Another major influence on share price is the overall health of the main economy in which a company operates.
Multinational companies may be implicated by the performance of several economies in different ways. In general, though, economic growth can lift share prices, while downturns can pull them down - even if company performance remains consistent.
This is due to the influence of measures such as GDP, interest rates, inflation and unemployment figures on investor confidence. In uncertain times, fears may grow among investors over faltering sales, hurting a company's share price even if those fears never come true.
During recessions, companies selling non-essential products and services tend to suffer most. This is because analysts expect people to cut back on non-essential items like clothing before sacrificing essentials such as medicines.
Political events
Politics is often closely tied to economic health. Certain policies and events can have strong influence on business performance and stock market trends.
It can pay off to monitor elections as well as any international developments that impact stability and trade. Companies that sell products internationally, for example, can see their share price driven up or down by new trade agreements, tariffs or sanctions.
Similarly, new government initiatives favouring particular industries - such as clean energy - can boost investor confidence in a particular company's prospects.
Supply and demand
We've discussed how stock price is determined by supply and demand between stock traders. But another factor at play here is supply and demand for a company's products and services.
Sudden increases in demand for a product - like videoconferencing software at the beginning of the pandemic - can cause stock prices to soar as buyers flood the market. Reductions in supply can do much the same, as seen with oil and gas stocks following Russia's invasion of Ukraine.
Liquidity
Liquidity is an often-forgotten influence on share price. Closely related to demand, it describes how quickly shares can be bought and sold without impacting price.
High-profile stocks have high liquidity, meaning that they're followed and traded in large numbers. Stocks with low liquidity can be trickier to sell, forcing owners to take bigger losses. This dynamic means that smaller-profile stocks can have something of a liquidity-based discount factored into their pricing.
Share availability
The number of shares available to the public also impacts pricing.
Companies can issue limited numbers of shares both initially and later down the line. This means that there's always a limited number available and, if buyer demand is high and supply is low, then share price will rise.
Companies can also buy back their own shares from investors to reduce supply. Whether cancelled or kept for redistribution, fewer shares in circulation can lead to higher share prices.
Market sentiment
Since share price ultimately relies on supply and demand, investor or trader sentiment can still overpower all the factors above. Sometimes traders will over or undervalue stocks - both individually and collectively - even if all other indicators tell a different story.
As such, market sentiment and therefore share price is often subjective and obstinate.
Analysing stock price movements
Knowing what affects share prices is one thing; understanding how to analyse these influences and predict further changes is another. This is where fundamental and technical analysis comes in.
Fundamental stock analysis focuses on a company's financial performance and external factors like those which we've highlighted above. It often employs ratios to determine stock value, including price-earnings ratio (P/E). Read more in our fundamental analysis guide.
Technical analysis primarily looks at historical price charts to predict future price trends. See more in our technical analysis guide.
Where to check stock prices
It's possible to monitor stock prices directly on the stock exchanges on which they're listed throughout the trading day. Alternatively, use our trading platform to see real-time price charts for your chosen markets. This way you can monitor trends and react from one convenient place.
Discover more with our other stock trading guides.
The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results.
With Tradu you can trade stocks via CFDs or you can own real stocks where you take ownership of the underlying asset.