Stock prices fluctuate for a myriad of reasons. Understanding a number of the possible causes for price fluctuations will help investors make better portfolio management decisions.
Market prices are simply the result of the supply and demand for shares by investors. When buyers are demanding more shares than are available at a specific market price, then the prices rise to a point where sellers can be found. Likewise, when sellers are abundant, prices will fall until buyers are engaged.
Market price gyrations can usually be explained by one or more factors which affect the demand for and supply of stock for sale at any moment in time. The list that follows explains several influencers:
Industry Specifics – all stocks can be grouped by industry sector (meaning they operate within the same part of the economy), i.e., consumer discretionary, consumer staples, energy, financial, healthcare, industrials, information technology, materials, communication services, and utilities. Macroeconomic industry changes will affect stock prices within the industry sector both positively and negatively.
New Regulations – governments make decisions and pass regulations that can affect business – for instance financial and telecommunication companies often find themselves within the government’s cross hairs. Increased regulation can have a large negative impact on stock price by making it more difficult and expensive to operate.
World Events – wars, terror attacks, boycotts, embargos, natural disasters, changes in economic policy and changing currency values all impact short-term equity prices.
Business Conditions – changes in management, new product announcements and discoveries, changes in market share, pending mergers or acquisitions, collaborations, change in competition, layoffs, data breaches, scandals, all affect stock prices – both positively and negatively.
Broker Research Reports – newly released publications regarding a company usually have an impact on stock price, sometimes in a major way, depending on the source and reliability. Even though conflicts of interest must be disclosed by regulation, investors frequently do not pay close enough attention to the closeness of the relationship between the author and the underlying firm, when estimating the longevity of the price movement.
Reported Earnings per Share – probably having the biggest impact on short-term equity prices, earnings surprises, can cause quick price changes. These stock price movements have become even more pronounced in recent years, due to the larger influence of automated trading. Earning per share trends are one of the primary determinants in long-term share prices.
Dividend Changes – sudden unexpected changes in dividend policy will cause stock prices to rise and fall. Investors need to be aware of how stocks act around the ex-dividend date: i.e., opening market prices are adjusted to reflect the to be dividend.
Buybacks or Dilutions – buybacks lessen the supply of stock available to purchase. With fewer shares outstanding, several key financial ratios will also improve. Conversely, by increasing the number of shares available to raise cash at the company level, all previously outstanding shares are diluted, making them less valuable (splitting the pie more ways).
Interest Rates and Inflation Trends – changes in interest rates cause changes in stock prices – sometimes rising rates are a positive catalyst, other times a negative. An example of rising rates being a positive for prices would be increasing inflation causing rates to rise, but since companies can increase their prices, they can also increase their earnings. On the other hand, if rates rise too quickly, companies may not be able to keep pace with raising prices, earnings will decline, and stock prices will fall. Additionally, rising interest rates increase the cost of doing business. If at the same time consumers are less willing or able to spend on goods and services, this too will put downward pressure on share prices.
Investment Taxation Policy – changes in tax policy have a change in the long-term value of securities. Increases or decreases in the after-tax value of investment income will impact the prices of securities. On a shorter-term basis, tax decision making can also affect stock prices. An example of this can be found in year-end tax loss harvesting further depressing stocks that have underperformed the overall market.
As stated above, stock prices fluctuate for a myriad of reasons. Understanding the possible causes for price fluctuations will help investors make better portfolio management decisions.