Stocks prices, like that of all assets, varies based on changes in supply and demand. We examine the factors of supply and demand for stocks to explain price changes.
The main actors that determine the price of a share are supply and demand. Basically, if there are more people wanting to buy a stock than to sell it, the price of the stock will go up because demand exceeds supply. On the other hand, if the supply is greater than the demand, the price will go down.
How supply and demand affect the price of stocks
Supply and demand affect the attractiveness (and therefore the price) of stocks. Although it may appear that there are other factors (such as the health of the economy and a company’s profits), these are actually drivers of supply and demand.
This means that even if you think a stock is over or undervalued, it is the market that decides how much it is worth. It’s about the dynamics between buyers and sellers.
If there are more buyers in the market, the demand grows and the price of the stock goes up, especially if the supply is limited. If supply and demand are nearly equal, the stock price is likely to move in a narrow range for a time, until one factor outpaces the other.
Supply Factors Affecting Stock Price
Supply factors that influence share prices include a company’s share issue, share buybacks, and sellers. It is important to note that the price of the stock will drop when supply is greater than demand and more investors start selling.
Issues of company shares
A share issue takes place when a company issues new shares to the public (in other words, it puts the shares up for sale). There is always a limited number of shares of a company outstanding, so if many investors want to buy them and the supply is low, the share price will go up.
Repurchase of shares
A share buyback occurs when a company buys its own shares from other investors to reduce the supply. When this happens, the shares are canceled or held for future distribution. A share buyback reduces the total number of shares outstanding, which could increase the share price as well as the earnings per share (EPS) of the company.
Sellers
Sellers are the investors who bring the shares to the market, thus increasing the supply. They usually sell for a profit, when they expect a price reversal or when they think the stock is losing a lot of value. If the demand does not correspond to the increase in supply, the price will fall. In the same way, if there are more buyers than sellers, the price will go up.
Demand Factors Affecting Stocks Prices
Demand factors that can determine the price of stocks include company news and results, economic factors, industry trends, market sentiment, and unexpected events such as natural disasters.
The lawsuit adds value to the shares. If there is no demand for a company’s shares, they will have no value.
Expected and unexpected news from a company
Any news about a company (expected or unexpected) can cause a change in its share price. For example, an earnings report that reveals significant profits, the launch of a new product, the publication of missed targets, or the death or departure of a key person in the company could cause changes in the demand and price of the actions. Even natural disasters can affect business and increase a company’s debt, thus causing lower demand.
Economic factors
Economic factors (including changes in interest rates, the economic outlook, and inflation) affect the price of stocks. If the interest rate and inflation rise and the economic outlook is poor, demand will tend to decline, and the share price is likely to fall.
Industry trends
The share price tends to depend on industry trends, as companies in the same industry often perform similarly and are exposed to the same pressures. Therefore, when a sector thrives, the demand for shares in that particular sector typically increases, which drives the share price. It is also possible that the demand for a company’s shares will go up if a competitor does not perform well.
Market sentiment
Market sentiment refers to the general impression that investors have about an asset, and it can be a very useful tool for an investor. It can be totally psychological, as investors are often influenced by the atmosphere in the market, rather than concrete figures or news, and it can also be quite subjective. However, it can be used in fundamental and technical analysis to calculate changes in the price of a stock.
How to analyze changes in stocks prices
To analyze the changes in the price of a stock you can use technical and fundamental analysis. By using these analyzes as part of your trading strategy, you can predict changes in the share price and find trading opportunities.
Fundamental analysis
Fundamental analysis is a method to study in-depth the finances of a company and the factors external to it, in order to calculate the value of its shares. Fundamental analysis typically uses various ratios to determine the value of the stock and calculate price movements, such as price-earnings ratio (PER), dividend yield, and return on equity (ROE).
Technical analysis
Technical analysis is a way of using historical charts to predict changes in the price of a stock. Historical prices are a useful way to predict future prices – if investors become familiar with past patterns, they can recognize them if they reappear. However, these patterns may have formed under special circumstances, so they are not always a reliable indicator.
