Why Do Stock Prices Change? Factors Explained

Introduction

If you trade or invest in the stock markets, you must have noticed that the prices of securities or shares change every second during the trading hours. On the same day, some stocks' prices soar while others decline. It is this change in the prices of stocks that intra-day and derivatives traders leverage to make money from the stock markets.

But have you ever thought about what can be the reason behind the changes in a stock's price? Well, there is no straightforward answer to this question. Several factors dictate the direction and magnitude of the price movement of a share. These factors can be technical, economical, company-related, or overall market-related.

Nevertheless, let's understand how share prices increase or decrease and the factors responsible for it.

The demand and supply factor

The most crucial factor that causes share prices to fluctuate is the demand and supply. If an increased number of people start investing in a particular share, its demand is high, so its prices start to soar. Conversely, if many people want to sell a particular stock simultaneously, its supply will increase, so its prices will fall.

Now, there can be several reasons that can impact this demand and supply chain. Suppose a company has declared dividends or announced a bonus issue of shares. Then, there would be a rush in the market to buy that particular stock. Now, the demand for that stock will increase, and its price will start moving northwards.

Factors that Impact Demand and Supply

Now that we have told you the reason behind the change in stock prices, you must be wondering what factors can impact a stock's demand and supply equation. So, here are the key factors that influence the demand and supply chain of shares and subsequently impact their market prices:

Company-related Factors

A share or stock is nothing but the security that denotes equity ownership in a company. So, any positive or negative development in a company will directly impact its share price. It can be good or bad news about a company, any public announcement regarding a company's financials, the launch of a new product or brand, a tie-up or merger, or the resignation of senior personnel such as the CEO or Vice President of the company.

These developments can directly influence the sentiments of traders and hence, causes an immediate rush or redemption. For example, if there is negative news about a company, traders start to sell off their shares due to the fear of losses. That leads to an increased supply of that company's shares in the market, causing its prices to decline.

Industry-related Factors

Any positive or negative news about the industry to which a company belongs can also influence its share price. For example, suppose the Government announced the ease in compliance for the distribution of telecom licenses, and the companies who operate in the telecom industry will witness a hike in their share prices.

Similarly, when the pandemic broke out and the insurance industry started incurring losses due to increased life insurance and health insurance claims, the share prices of every insurance company started to decline.

Market Trends

The current market trend also impacts the prices of shares. You must have heard these two terms repeatedly – a bull market and a bear market. A bull market is when the indices go up, and a bear market is when the indices go down. That usually happens when the investors feel optimistic or pessimistic about the market's future.

During bull markets, the prices of most shares go northwards, and during bear markets, the prices of maximum shares go southwards. That may happen regardless of the company's or industry's performance.

Other Factors

Apart from the factors that are mentioned above, several other factors may also influence the market. These can include geopolitical factors, macroeconomic factors, investor sentiments, changes in the GDP or the inflation rate, etc.

For example, when there is an unexpected change in the central or state Government, markets usually witness a decline. Similarly, if the overall GDP of a company goes up, the share markets also witness a boom.

To Conclude

Knowing why stock prices change, you can make your trading decisions accordingly. These factors can be instrumental for short-term investors or intra-day traders since they depend on daily market volatility to earn profits. These factors carry less significance for long-term investors as they believe in staying invested for a considerable period irrespective of the short-term market movements.