A share price (also known as a stock price) is the numeric price given to a single share of a companies stock. You can purchase shares / stocks through a stock broker, once the purchase transaction is completed, the owner becomes a shareholder of the company. Share prices fluctuate based on demand and supply. Trading of shares (or stocks) within a company cause the share price to change, the share price falls if there are more sellers than buyers. However, if there are more buyers of shares than sellers the share price will go up, as a result, share prices fluctuate daily. This is the basic principle of demand and supply in economics. You can seen example of share prices at the end of this wiki.
There are a number of fundamental factors that drive an investor or trader to buy or sell shares which in turn adjust the share price.
- Specific Company News
- Economic & World News
- Economic Indicators
- Currency Movements
- Seasonal Patterns
- Technical Charting Indicators
- Company Fundamentals
- Politics and Politicians
- Market Sentiment
All these factors can drive the investor / trader to either buy or sell shares.
Share Price Movements in detail:
Specific Company News flow such as new product development, new business gained from supply of services or products for a specific third party or reporting of earnings which either meet or exceed analyst expectations will in general increase the share price. Conversely if a business reports news of business being lost or trading in their market in general is being affected by the economy or they report earning which are either decreasing, at a loss or less than expected, the share price will in general go down. News is reported via many web sites, some is regulatory and some from other sources.
Economic & World News has an impact across the whole spectrum of the market and in general would move the major market indices either up or down based on the news. Key indexes to watch exist for each country, as an example you have:
EU: DAX / CAC40
ETF (Exchange Traded Funds) / ETN (Exchange Traded Notes) exist for most indices. ETF’s being the safer alternative in case of any insolvency issues with the company selling the ETF / ETN.
Economic Indicators exist for gauging the state of a countries economy, as the USA China
Currency Movements have a high correlation to the movement of share prices, it should be noted that when examining the currency price data and rebasing currency movements, index charts can almost appear the same. For instance the S&P 500 & Nikkei 225 can have this effect over long periods of time.
Seasonal Patterns that affect share prices, there is a well known saying whereby you should sell in May and buy in September, over decades this has been proven to be a very successful trade. The explanation to this is the summer holidays causing a down swing due to less demand in the economy, and the pre / post Christmas manufacturing and trading season, more people are in work making and buying business to business and business to consumer.
Technical Analysis is the view of a share prices past movements shown via a chart. The share price chart is then analysed technically. Many indicators are used to divulge past share price movements and the potential for the share price to move up or down against the given indicators. Typical indicators used are moving averages 20 day / 50 day / 200 day, bollinger bands, fast & slow stochastics and MACD moving average convergence divergence. Other indicators are support and resistance levels of a share price, basically where it can be seen that a share price has had a fall in value from a high, this is resistance and support is where a share price has stopped falling and held its price and subsequently advanced up.
There are further exotic analysis methods such as Elliot Wave Theory based on natures laws / mans rhythmical routines, astrological events, solar sunspot output and many more. It can be quite enlightening to look at such reports as at time over many months and years they appear to have notable correlations to the movement in share prices / stock market indices.
Company Fundamentals or fundamental analysis is when the share price is directly analysed against the earnings and dividends of a firm, PE price to earnings ratio gives earnings per share, book value or tangible book value (minus all debts) and future predicted earnings given by analysts / the company itself give indications of the real value of a companies assets per share. Any premium above book value is driven by the market and either the past or suspected future performance. Other factors can be assessed such as beta and PEG which give indications on future speed of growth when the economy is a favour of expansion for the specific market sector. When all us assessed an supposed efficient share price should be given to the company.
Politics and Politicians can have major impacts on share prices and stock markets. Politicians are significant movers on news flow which is the major mover of market sentiment and there is likely a level of control brought about over media, even from indirect media flow being manipulated by politicians. They can apply pressure to their central banks for example the Federal Reserve, purposefully foster bubbles through poor regulation and commands from a president / prime minister can be given to regulatory bodies, as happened in 2002 – 2008 with light touch policies from the UK Financial Services Authority. When you see mortgages of 100% – 110% on bubble property prices you know there’s something rotten happening. The same set of light touch policies occurred in the USA
Other key factors that move share prices are interest rates and inflation, too high and the markets will likely fall. If interest rates are too low they can foster a stock market bubble, in turn the blunt tool can be used to reduce the pain of a recession and assist in turning an economy to growth. However if the tools are used incorrectly and too often over a prolonged period, it can lead to a ponzi style economy, which ultimately can cause an economic disaster and national defaults. This would affect all asset classes, including gold.
Due to the level of news manipulation be extra cautious and do not let the media as a whole drive your investing strategy, although being aware of manipulation should improve your market timing for buying and selling shares.
Market Sentiment is driven from fundamental facts on companies, economies, market indicators, news flow, credit booms and busts, major world disasters, central bank policies, seasonal patterns, politicians, regulation or lack of and all the factors above.
In effect this delivers a market emotion and movement. In this will send the stock markets and company share prices up (bullish) or down (bearish).
Investing note: The most powerful form of investing is to utilise most of these methods which I use in my investing and trading strategy.
