Why Do Stock Prices Fluctuate? A Beginner’s Guide

4 min read

From the time markets open until trading closes, stock prices are in a state of constant fluctuation!!

Though many try but practically nobody can predict every element that goes into stock price fluctuations. Everything from a breakout news story to a shareholder meeting (as discussed in our previous post) can impact a stock’s price. A lot of times, it has to do with supply and demand, such as we saw during the IPO mania.

Lakhs and crores of shares are bought and sold each day, and it’s this buying and selling that sets stock prices. Stock prices go up and down when someone agrees to buy shares at a higher or lower price than the previous transaction. As mentioned earlier as well, this dynamic is dictated by supply and demand.

Here’s a simple illustration: Imagine there are 1,000 people willing to buy one share of ABC Limited for Rs.100, but there are only 500 people willing to sell one share of ABC for Rs.100. The first 500 buyers each snag a share for Rs.100. The other 500 buyers who were left out then raised their offer price to Rs.150. This higher offer price induces some owners of ABC who didn’t want to sell at Rs.100 to agree to sell at Rs.150, and eventually the share price becomes Rs.150 instead of Rs.100.

Understanding supply and demand is easy. What is difficult and important is to comprehend what makes people like a particular stock and dislike another stock. This comes down to figuring out what news is positive for a company and what news is negative which ultimately affects the price of the respective stock. 

There are two kinds of factors that affect the share prices, let dive deep into them one by one.

Supply factors that affect share prices

Supply factors that affect share prices include company share issues, share buybacks and sellers. It’s important to note that share prices will come down when supply is greater than demand, and when more investors start to sell.

  1. Company share issues

A share issue is when a company releases new shares to the public (through IPO/FPO/rights/bonus/private placements). In other words, when it makes more shares available for purchase. Such issues add to the shares already in supply, and unless there is already an excess of demand over supply of shares, it will exert downward pressure on the share price for such a time as it takes to absorb the excess supply of shares.

  1. Share buyback

A share buyback is when a company buys back its own shares from investors to reduce supply. Once this happens, the shares are either canceled or kept for redistribution in the future. A share buyback reduces the total number of shares in circulation, which could increase the share price as well as the company’s earnings per share (EPS).

  1. Sellers

Sellers are the investors responsible for pushing shares back into the market, increasing the supply. They normally sell to make a profit, when they expect a reversal, or when they think the share is losing too much value. If demand doesn’t match the increased supply, the price will go down. Equally, if there are more buyers than sellers, the price will rise.

Demand factors that affect share prices

Demand factors that can affect share prices include company news and performance, economic factors, industry trends, market sentiment and unexpected events such as natural disasters.

Demand gives shares value. If there is no demand for a company’s shares, they will have no value.

  1. Expected and unexpected company news

Any news surrounding a company – expected or unexpected – can cause movement in its share price. For example, an earnings report that reveals significant profit, a new product launch, missed targets, or the death or departure of a key figure could all lead to swings in demand and share prices. Even natural disasters can cause business disruption and increase a company’s debt, meaning less demand.

  1. Economic factors

Economic factors including interest rate changes, financial outlook and inflation all affect share prices. If the interest rate and inflation go up, and the economic outlook is poor, demand will usually decrease, and the share price is likely to come down. Again these factors are sector specific, like an interest rate hike can benefit the financial services sectors causing a rise in stock prices. Overall, interest rates are one of the most important factors that impact the stock market.

  1. Industry trends

Industry trends often determine the price of shares because companies in the same industry often perform similarly and are subject to the same pressures. So, when an industry is booming, share demand in that specific sector will often increase, pushing share prices up. It’s also possible for demand for one company’s shares to increase if a competitor is doing poorly.

  1. Market sentiment

Market sentiment refers to the overall feeling that traders have about an asset. Understanding market sentiment can be a powerful tool for an investor. It can often be purely psychological, as investors are influenced by the mood in the markets instead of concrete news or figures. It can also be quite subjective and assumptive, but can be used to inform fundamental and technical analysis to estimate changes in share prices.

  1. Influencer driven trends

The boom in social media has affected almost all the sectors, and the stock market is not untouched by it. People believe what the influencers say, and they do make their financial choices accordingly.One single tweet from Elon Musk and Mark Zuckerberg shakes up the crypto world and changes the market statistics in a matter of minutes. It’s always advisable to learn from great investors but with your due diligence.

The stock market may have its ups and downs in the short term, investing is a great way to build wealth in the long term. Be sure that you’re investing smartly with a strategy that suits your financial goals, and keep your focus on your long-term goals to avoid making hasty decisions based on short-term panic or FOMO.

It’s a good idea to diversify your portfolio as much as possible, so that you’re spreading out your risk over multiple investments. An easy way to do this is by primarily investing in ETFs and index funds instead of individual stocks. Check out our previous blog to learn how well you can diversify your portfolio and how it impacts your risk management.

Now when you have fully understood the factors that push stock prices to rise or fall, you’re all set to go ahead and get your trading and demat account in order to begin navigating the stock market. On trading platforms such as ShareIndia, you can open an online trading account within minutes today. And if you already have one with ShareIndia, you get access to world-class technology that helps you track the ups and downs of the share market and helps you in making an informed decision.

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