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What are the factors that affect the changes to the price of stocks?
Due to the market force of supply & demand the change in the stock prices is of a daily phenomenon. If the ratio of demand to supply is higher, the stock prices go upwards. But when this ratio comes below the mark of “one”, the stock prices go downwards. Demand & supply are directly related to buying & selling respectively.
It is quite easy to understand the concept of demand and supply. The thing that is somewhat more complex to understand is that why people prefer a particular stock to others. Different planning and strategies of different investors govern this preference to the stocks and it involves the favorable or unfavorable news concerned to the companies.
Stock prices of an individual companies vary according to the understanding of investors for the company’s worthiness. Never judge the value of a company through its stock price rather it should be judged through the market capitalization of the company. Market capitalization is calculated as the stock price multiplied with the shares outstanding. To understand it more clearly take an example: the company having stock price @ $50 and 5,000,000 shares outstanding ($50 x 5,000,000 = $250,000,000) has more value than the company having @ $100/share and 1,000,000 shares outstanding ($100 x 1,000,000 = $100,000,000). Besides, deciding the value of a company the stock prices are also used to assess the future growth of the company.
Now the more a company’s earning the greater is its value in the market. Earnings of a company show its profit and if there is no earning to show then obviously there is no profit or money to run the company. The earnings of public sector companies are reported in a year for four earning seasons, at which the Wall Street keeps its attention. The reporting of the earning has a very important value in deciding the future value of a company. The more a company shows its earnings the better its chance to be valued highly by the market analysts and the investors; and this analysis is based upon the future earning projections of the company decided by their current earning report.
But the earning is not the sole reason behind the pricing of the stocks. There are other forces too that works towards deciding the stock prices. To understand it, we should go into the market during dot-com-bubble. That time many Internet companies mushroomed with their market capitalization worth millions of dollars and that without having any supportive earning to report. Most of these companies couldn’t hold to their capitalization and been valued far lower than expected from their capitalization. So’ it’s quite clear that there are other driving force too that are working towards determining the vale of stocks. Some of those forces include very strange terms like, Moving Average Convergence Divergence (MACD) and Chaikin Oscillator, while there are some more familiar terms too like, P/E ratio.
So, why the stock prices keep changing?
It’s answer is not a an easy task to find out. There are people who believe that creating flow-charts with the help of past performances of the stocks, it is possible to determine the value of the stocks. Then, there are people who think that it is simply not possible to determine the value of stocks for sure. So, one can say that the thing that is known for certainty is the uncertainty of the stock prices.
Points to be kept in mind for this subject are:
· The first thing having determining effect on to the stock price is supply & demand.
· While comparing the value of two companies the market capitalization (i.e., price * shares outstanding) should also be considered.
· In theory it is the company’s earning through which investors assess the value of a company, but it is not completely true. Other common factors have also their roles to play, like expectations, sentiments, reliance of the investors towards the company.There are several theories doing the rounds that claim to be most effective in determining the stock prices, but in reality not a single theory is capable enough to correctly predict the stock price.