The increase or decrease of a stock price is what causes investors to realize a profit or loss. The great thing about investing in stocks is the ability to profit when a stock price rises or declines. Stock prices increase and decrease based on investor supply and demand within the market. To make wise investment decisions, it is important to understand the factors that most commonly impact stock prices.
The primary factor that causes stock prices to increase or decrease is the company’s earnings. Earnings are considered the money a company makes after it pays its liabilities. The Securities and Exchange Commission requires public companies to report their earnings. Investors use the financial earnings of a company to determine its future value. A company’s stock price typically increases when it reports positive earnings and declines when it experiences a loss in net income. One way to determine a company’s earnings is by analyzing its income statement.
In addition to earnings, events within a company can cause a stock to increase or decrease — for example, a company issues a faulty product and then recalls it. Some investors might become pessimistic about the company’s short-term earnings and consequently sell the stock, causing the price to decline. By contrast, a company can announce a new, highly anticipated product going on sale in the near future. Typically, investors will see this is a positive event. If demand for the stock rises, the price is likely to increase as well.
Companies declare dividends to share profits with investors. The impact of dividend declarations on a stock depends on the amount of the dividend. After a dividend declaration, the price of the stock typically increases in the short-term because investors desire ownership rights within the company. The increase in stock price is temporary. In the long term, a dividend declaration causes the price of a stock to decrease. If investors feel the dividend declaration is too low, the stock price typically experiences a substantial decline.
Buybacks and Stock Splits
In many cases, companies buy back their own shares in an attempt to increase the share price. Investors often view buybacks as management possessing a positive outlook on the company’s future. Companies also buy back their own shares when they feel as if they are undervalued. A company uses a stock split to decrease the price of its stock to make shares more affordable for investors. The stock price usually increases over time as market demand grows.
- Creatas/Creatas/Getty Images