Stock prices are determined by the price for which investors are willing to buy and sell them. The amount investors are willing to pay for a stock is based on their expectations of how well the underlying company will perform in the future. Understand some of the general types of events and information that play a role in influencing investors’ expectations.
Each share of stock entitles an investor to a partial ownership in a company and a partial claim on its earnings, or profits. Any news or information about a company’s financial standing or earning ability can affect its stock price. Positive news that suggests a company can increase its future earnings or improve its financial position typically leads to an increase in stock price. Negative news that suggests that a company may reduce its earnings or that its financial health may deteriorate typically leads to a decrease.
Investors attempt to estimate a company’s future performance based on information about its competitors and its industry. News about growth in a company’s industry or news about an increase in demand for a competitor’s products may suggest increasing demand for a company’s products, which may cause an increase in its stock price. News that suggests a company’s industry may suffer a decline or news that a competitor forecasts weakening demand may cause the company’s stock price to decrease.
The overall direction of the economy can affect the overall stock market and individual stocks. In general, when the economy is expanding, stock prices tend to increase as companies gain new customers, expand into new territories and create more profits. Stock prices tend to decrease when the economy declines as companies halt expansion and customers buy fewer products, which can lead to lower profits.
National and local governments can influence how companies conduct business in the United States and in other countries. New laws, tax policies and regulations that positively affect a company’s business may result in a stock price increase, while ones that negatively impact a company’s business may cause its stock to decrease. In addition, signs of political instability or the threat or war in a location in which a company conducts business can cause its stock to decrease.
- Expectations Investing: Reading Stock Prices for Better Returns; Alfred Rappaport, et al.
- Stanford University: Cardinal Money Management -- Changes in Stock Price
- Stock Investing for Canadians for Dummies, Third Edition; Andrew Dagys and Paul Mladjenovic
- Financial Markets and Institutions, Ninth Edition; Jeff Madura
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