The price of a share of stock at any given time is determined by supply and demand, or how many people are willing to buy or sell shares of that stock at any specific price point. As various factors influence investors to buy or sell the stock of a particular company, the price of the stock can change rapidly. Understanding the factors that cause investors to buy or sell shares of stock can help you determine whether to buy, sell, or hold on to shares of your own stock, helping you to minimize losses and maximize returns.
A stock price can be influenced by a variety of factors, ranging from earnings reports and interest rates to general market sentiment.
Understanding Earnings Reports
The U.S. Securities and Exchange Commission requires all publicly traded companies to release an earnings report four times each year. This report specifies how much the company has earned or loss over the previous quarter. Stronger-than-expected earnings can increase demand for shares of stock, causing prices to go up. When earnings are lower than expected, or the company experiences a loss, investors often sell their shares, causing prices to go down.
Impacts on the Economy
When the country experiences a recessionary period, consumers have less money to spend on everyday purchases. As a result, companies that make items like cars or electronics earn less money, resulting in lower earnings. These lower earnings have a two-fold effect on stock prices: Low earnings reduce demand for shares of stock, but also indicate that the company has less money to invest in the future. Without the prospect of future growth to entice investors, demand for the stock will decline, causing a decrease in stock price.
A thriving economy has the opposite effect on stock prices. When people have more money to spend, manufacturers experience greater demand for their products, leading to higher earnings. This entices investors to buy shares, and may also lead the company to expand its operations, resulting in higher potential for growth in the future. This growth potential often increases demand for stock, leading to an increase in share prices.
Exploring the Effects of Interest Rates
When interest rates are low, companies are more likely to borrow money, which allows them to grow. Such growth makes the stock of a company more attractive to investors, leading to increased demand and a rise in share prices. As interest rates rise, companies tend to borrow less, leading to contraction. With a reduced potential for future growth, demand for the stock goes down, along with its price.
Assessing Energy Prices
Fuel is used to power manufacturing equipment, light factories and warehouses, and deliver goods to stores, so running businesses consumes a great deal of coal, oil and gasoline. Any change in energy prices can have a significant impact on earnings. As energy prices rise, companies may experience greater costs and lower earnings, which can reduce demand for a stock, thus lowering its price. As energy prices fall, expenses fall, resulting in higher earnings and increased stock prices.
Reviewing Analyst Ratings
As financial analysts raise or lower their ratings of a company, this information can cause stock prices to rise and fall based on the reactions of investors. If a prominent analyst upgrades a company, investors may flock to the firm, leading to a rise in stock prices. A downgraded rating can cause investors to sell shares, leading to lower share prices.
While analyst ratings are determined by a wide host of factors, their ratings are often based on news that impacts a company. For example, an analyst may upgrade a drug company that has just patented a new life-saving drug. If this drug is superior to any products offered by the company's competitors, analysts may offer a downgraded rating for these competitors.
Emily Beach works in the commercial construction industry in Maryland. She received her LEED accreditation from the U.S. Green Building Council in 2008 and is in the process of working towards an Architectural Hardware Consultant certification from the Door and Hardware Institute. She received a bachelor's degree in economics and management from Goucher College in Towson, Maryland.