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What Really Makes a Stock Go Up and Down

Updated on 2013-05-30 by Guest

Investors are always on the look out to make good returns from their investments into the capital markets. To provide for such returns, it is essential that they gain better understanding of what makes their stocks move up and down in the market. It would be good if you could know that these are basic determining factors for your investment returns so that you could make your investment decisions accordingly. The movement in share prices of companies is basically determined depending on the demand and supply conditions of the shares. When a particular company’s stock is much in demand with more number of investors placing buy orders, then the share price of the company would increase. On the other hand, when more number of investors intends to sell the shares, then the demand would be less and the share prices would decline. Researches had been taken up since the invent of stock exchanges to analyze the factors which determine the demand and supply conditions of the shares and hence the movement in the share prices. Based on such continued attempts to understand the markets, the factors which influence the stock market movements are generally summarized into three basic categories namely the economic factors, the industrial factors and the company specific factors. These factors basically have an impact on both the returns prospects of the company as well as on the investor sentiments which further makes the stocks move up and down based on demand and supply conditions.

Economic Factors

The economic development of the country in which the company is functioning as well the global economy as a whole have major importance in determining the stock market movements. Say for example, if the country’s Gross Domestic Product (GDP) is growing at positive rate, then the stock market would be moving in the upward direction. This is because the positive growth rate of GDP presents excellent growth opportunities for the companies in the nation through increasing sales and better profit margins. Such growth opportunities implant positive sentiments among the investor community and thereby investors would look forward to buy more shares from the capital market. As the number of buy orders in the market increases, the demand for the shares increases and thereby the stocks move up to a bullish market.

On the other hand, when the inflation rate in an economy is higher, the investible income in the hands of investors declines. This results in the investors trying to sell much of their shares so as increase in the income in their hands. Hence a negative sentiment settles down among the investors and they would place more number of sell orders. Thus the share prices would decline as the inflation rate increases and hence market would move towards a bearish state.

Such other factors at the country’s economic level which influence the market movements are the employment rate of the economy, foreign exchange rate prevailing in the economy, tax rates, interest rates imposed by the banks for lending and borrowing, etc., Though the list is not exhaustive, the major national level economic factors influencing the stocks to move up and down are determined based on the fiscal policy, monetary policy and the supply side policies of the economy.

On the other hand, the factors at the global level which influence the stock market movements include political factors in the other countries, trade agreements between countries and the business level factors in the global economies.

Industrial factors

Coming down from the economic factors at the national and global level, the next major set of factors which determine the stock market movements include the factors specific to relevant industries in which the companies are operating. Such industrial factors include the business life cycle, industry structure and the industry life cycle.

The four major stages involved in a business life cycle include the recovery, peak, recession and trough stages. Depending on which stage the business economy of a country is presently in, the industries which would outperform could be identified. For example, if the business lifecycle is in the trough stage, then certain basic industries such as pharmaceutical industry and FMCG sector would be performing well compared to the other industries. On the other hand, if the company is in the recovery stage, then the capital goods industries and the banking sector would be performing well. This is mainly because during the recovery stage all the other industries in the economy would be looking out to improve their production levels so as to tap the forthcoming demand which would accompany the peak stage of the company. Thus the stage of business lifecycle of the economy plays an important role in determining the stock market movements towards either direction.

Further, the industry structure based on factors like threat of substitutes, threat of new entrants, strength of the competitors, bargaining power of suppliers and bargaining power of buyers would also determine the stock market movements. In addition, the industry lifecycle of a specific sector also determines why stocks move up and down in the market. The stages of the industry lifecycle include development stage, pioneering stage, maturity stage, deterioration stage and stagnant stage. The stocks of industries in the first three stages witness upward movements and the stocks of industries in the last two stages witness downward movements.

Company factors

The final set of factors which have a major role in determining why stocks move up and down is related to the specific companies under analysis. The factors relating to the companies such as the strength of management of the company, financial results of the company including revenues, net income and profit margins and future financial prospects of the company determine the movement in share prices.

Thus to understand why stocks in a capital move up or down, it is essential to understand the three level of factors relating to the stocks – namely economic, industrial and company specific factors. Detailed analysis on this set of factors would enable the investors to better understand why stocks in a market move up and down.

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