What Is the Most Basic Factor That Affects Stock Price?

When you buy a share of stock, you are actually buying a tiny piece of the company. Each share of stock represents an equal level of ownership in the company, and the more shares you own, the greater your percentage of ownership. Whatever your reason for buying stock in a particular company, you probably bought it expecting the stock's price to increase. The primary thing that will drive your stock's price higher is supply and demand.

Supply and Demand

While many forces affect the market price of any stock, the most basic is supply and demand, according to the New York Stock Exchange. If more investors want to buy a particular stock than there are investors willing to sell their stock, the market price of that stock will increase. If more investors want to sell their stock than want to buy those shares, the stock's market price will decline.

Supply

The supply of stock is provided by publicly traded companies through either an initial public offering or subsequent stock offerings. The number of shares is finite, based on the company's bylaws, so the supply side of the investment equation is fixed. Once the stock has been issued, you have to buy shares from another investor. That's where your stockbroker and investment exchanges come in. They match stock buyers with stock sellers.

Demand

While the supply side of the stock trade equation is fixed, the demand side is in a constant state of flux. A multitude of factors can affect demand, both positively and negatively. Continued strong earnings, breakthrough developments of new products and positive general economic trends can all fuel increased demand for a particular stock. Poor financial performance, management instability, bad economic or political news or a general downturn in the industry can all create a low demand for stock.

Considerations

You probably bought your stock expecting that its market price would increase. But you probably also bought the stock from another investor who was equally convinced that the market price of that stock was about to decrease. While long-term investments in the stock market -- those of around 15 years -- tend to result in positive returns, the market offers no guarantees that the share price of any particular stock will increase in value. Past performance doesn't guarantee future results, and you could lose money on your stock investment.

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About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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