Three Factors That Affect the Market Value of a Stock

When you buy a stock you're no doubt hopeing to turn it into a profitable investment by watching its market value rise. The problem is, you're buying the stock from another investor who probably expects the stock price to drop. Nobody has a crystal ball that reveals whether stock prices will rise or fall, but there are some factors that influence a stock's value.

Supply and Demand

The primary factor that determines the market value of any stock is supply and demand, according to the New York Stock Exchange. There are limits to the supply of any company's stock, even though that number might be in the millions of shares. If more investors want to own the stock than there are shares available for sale, the market value of the stock rises. If more investors want to sell their stock than there are available buyers, the stock's market value drops. While supply and demand dictates the market price of a stock, many factors also influence supply and demand.

Financial Performance

Companies that make money are typically more valuable than companies that lose money, though there are exceptions. A company that grows its earnings on a consistent basis is also more likely to hold its value than a company with erratic earnings growth. A company's value is also influenced by how consistently it meets or exceeds earnings expectations set forth by analysts. A company that consistently meets its expectations is a more desirable investment to most investors than a company that consistently falls short of expectations. Finally, companies that perform well in both good and bad economic times usually see their performance rewarded by increases in their stock price.

Economic Trends

The market value of stocks can be affected by economic trends that might have little or nothing to do with the individual company's performance. For example, if the whole country is experiencing an economic boom, the market price of an individual stock might rise in tandem with other stocks. If a company is part of a specific industry group that experiences a sudden downturn, its stock price can tumble even if the company is producing solid financial results.

News and Emotions

Breaking news can influence how investors perceive a particular company or the economy as a whole. News can have a positive or detrimental affect on stock prices, sometimes driving the price of different stocks in different directions. For example, news of an impending war might cause defense stocks to rise but cause entertainment stocks to fall. News of increases in interest rates or commodities can also affect the value of a company. Money is an emotional subject and sometimes emotions trump reason when it comes to stock investments, resulting in market prices being driven up or down far beyond what is justified by the company's performance.

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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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