Investing in stock is among the most risky, and potentially profitable, things to do with your money. Stock prices are reflected in daily quotes as well as the ever-changing prices throughout the trading day. While stock is safest as a long-term investment, it's useful to understand what impacts a stock price no matter how long you plan to hold it.
The performance of the company in which you own stock is one of the major factors that affects price and one over which the company itself has the most control. Profitability, market share, stock price-to-earnings ratio and other financial data all illustrate how valuable a company is and how much investors are willing to pay for a share of it. This is known as valuation, and it goes a long way toward determining stock price.
The broader economy also weighs on stock prices. When growth is high throughout the market, or in the sector in which the company you own stock operates, prices are more likely to rise. A weakening economy can bring down stock prices as investors are willing to risk less or businesses are unable to earn as much as they could under better conditions. Economic trends can be worldwide patterns or isolated to particular areas of the economy, such as the banking, housing, technology or retail sectors.
Investors are the individuals who actually determine stock prices, and their beliefs and actions impact stock prices. Investors typically are willing to pay more for stock when it's in short supply or deemed likely to grow in value. Likewise, when stock is readily available or investors see it as unlikely to gain much value, its price may drop. Investors' attitudes and confidence levels can affect stock price as much as any other factor, even if these beliefs are unsupported by hard economic data.
Government agencies make decisions and pass laws that can affect business, which further impacts stock prices. Increased regulation that makes it more costly to do business can lead to a drop in stock prices for companies that are likely to be affected. Central bank policies that change how difficult it is for businesses to borrow money and tax policies that alter what businesses pay to the government all lead to changes in how companies operate and what investors can expect from share prices.
- Stock quotes image by Chad McDermott from Fotolia.com