Key Factors That Influence Share Prices

Company Fundamentals (Financials)

The performance of a company in terms of top-line and bottom-line growth, profit margins, earnings before interest, tax, depreciation, and amortization (EBITDA), earnings per share (EPS), dividends, and overall financial wellbeing can have material effect on the determination of a company’s share price. The fundamentals have the capacity to influence investors’ sentiment positively or negatively in relation to a company’s share prices. A rational investor will seek to maximize returns where possible. Therefore, a company with a weak financial performance will not be able to attract investors, leading to a fall in its share prices. Generally, rational investors have propensity to acquire shares in a company with exceptional performance. This will increase demand for a company’s shares, leading to an increase in its share prices.

Demand and Supply

The demand and supply dynamics can significantly influence the share prices of a company. When there is high demand for a company’s shares arising from strong financial performance, positive news about the company, favourable industry trends, or perceived stock underpricing, the share prices will tend to increase. However, when the number of shares available for sale in the market is more than the unit of shares demanded by investors, the share prices will drop. Generally, the events such as insider selling, share buybacks, stock issues, initial public offering, or secondary offerings can put pressure on a company’s share prices.

Industry Performance

The performance of the industry where a company operates can affect its share price. A rapidly growing industry can attract positive sentiment from investors group, which can significantly enhance a company’s share prices. A sector with a bad reputation cannot command any positive influence from the market. Hence, the share prices of the companies operating in such sector may not be attractive.

Market Sentiment

The overall attitude, mood, or psychology of investors about a company’s shares can affect its share prices. Factors such as market speculation, rumours, investor perceptions, etc. can significantly influence a company’s share prices. Specifically, when the market sentiment is bullish, the share prices rise, whereas a bearish market sentiment indicates a declining share prices.

Economic Factors

The macroeconomic indicators of a country, including GDP growth, interest rates, inflation rates, unemployment, etc. can have material effect on the companies’ share prices. Strong economic indicators can enhance investor confidence, leading to increased share prices. In addition, a stable economy has the tendency to attract foreign direct investments, leading to high demand for companies’ shares, and hence increase in share prices. Whereas a country with a troubled economy will discourage foreign direct investment investments, and the existing investors may sell-off their shares, resulting in a fall in share prices.

Monetary Policy

The central bank decisions or actions about interest rates can affect countrywide economic activity, borrowing costs, consumer spending, purchasing powers, etc. This  can materially influence the share prices. If the policies announced by the central bank is favourable to investors, the market sentiment will be positive, and share prices will tend to increase. But unfavourable policies can erode investor confidence, which may prompt sell-off, and in effect, declining share prices.

Regulatory Changes

Changes in government policies or regulations can affect a particular industry or industries, leading to a change in companies’ share prices. For instance, an increase in companies’ income tax rates can affect all companies operating within an economy, which may lower earnings, and in effect, the share prices. Contrarily, if government decides to reduce companies tax rates, earnings will increase, which will boost the share prices.

Geopolitical Risks and Global Events

Investors will always avoid any country with a turbulent political environment to minimize financial risk. The events such as war, natural disasters, geopolitical tensions, or global economic crises can create uncertainty in the financial markets leading to gyration in share prices.