A Brief Explanation of the Major Factors That Influence the Value of Common Stock

by Geri Terzo

Common stocks are the most widely traded equity securities in the financial markets. Prices are established based on supply and demand, the latter of which can be driven by anything from profit performance to economic conditions or investor emotions. Stocks also have a tendency to be volatile, and even if one piece of news drags the value of a security lower, the price could rebound as investor perception shifts.

Profits and Sales

A company's profitability is a major factor that affects the value of a common stock. Investors typically react to quarterly or annual profit results based on some expectation set forth in the markets by company executives or financial analysts. Revenues are also influential because they are a measure of sales. Technology company Applied Materials delivered mixed third-quarter financial results in August 2011, topping estimates for profits but warning that future revenues would drop. Investors decided to respond to the negative news, and the stock value dropped.

Economy

An economic recession is a major event that influences the value of common stocks. In August 2011, investors began frantically selling stocks amid fears of an economic recession, which positioned the stock market for one of its most severe days of selling ever. It had only been three years since the most recent financial crisis and the markets were exhibiting the extreme volatility that was common during the previous economic contraction.

Catastrophe

Investors are opportunistic and even catastrophic global events, such as the severe earthquake that hit Japan in 2011, have the potential to influence the value of common stocks. The stock market was highly volatile in response to the news of the catastrophe in Japan as uncertainty about the fate of country and its businesses loomed. Analysts responded, for example, by measuring the effect that the loss of life in the country would have on the profits at insurance companies.

Seasons

Historically, stock prices are driven higher during the December holiday season and into the New Year, according to the MarketWatch website. Stocks tend to advance the most during the final few trading sessions of the year and the strength often continues in January. Historically, the most robust stock market buying activity occurs in countries where Christmas is observed. The higher stock prices could be a result of greater confidence in the economy as consumers spend money, according to MarketWatch.

About the Author

Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.

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