What Causes Stock Prices to Fluctuate? Affecting the Cost of Equity and Share Prices
It is influenced by various factors that affect the demand and supply of the share in the market, such as earnings, industry performance, investor sentiment, policy and regulatory changes, speculation, liquidity, etc. The equity price of a share depends on various factors that affect the demand and supply of the share in the market.
- Liquidity : Liquidity means how easy it is to buy or sell shares. If there’s a lot of liquidity, it’s easy for investors to sell their shares, and the share price might go up. If there’s not much liquidity, it’s tough for investors to sell their shares, and the share price might go down.
- Investor sentiment : Investor sentiment is like the feelings and confidence of investors in the stock market. It depends on things like how the economy is doing, political events, what the media says, and rumors. When investors feel good, they buy more shares, and that makes share prices go up. But when they feel bad, they sell more shares, and that makes share prices go down.
- Speculation : Speculation means buying or selling shares because you think the prices will go up or down in the future, not because of how well the company is doing. Speculators want to make money from the ups and downs in share prices. They might use things like borrowing money, special financial contracts, or selling shares they don’t own (short-selling). Speculation can make share prices go up and down a lot, and it can make the market less predictable because it’s based on expectations rather than the actual health of the company or industry.
- Earnings and profitability : Earnings and profitability show how well a company makes money from its activities and assets. People are ready to pay more for shares of companies that make a lot of money or are expected to make more money later. Earnings per share (EPS) and a measure called the price-to-earnings (P/E) ratio are often used to figure out how well a company is doing in terms of earnings and profitability.
- Industry Performance : How well the industry a company is part of is doing can impact its share price. If the industry is getting bigger, being creative, or dealing with good market situations, the share prices of companies in that industry might go up. On the flip side, if the industry is shrinking, dealing with tough competition, or facing bad market situations, the share prices of companies in that industry might go down.
- Policy and regulatory : Policy and regulatory changes mean when the government or other authorities make new rules that affect how companies work. These changes can be about taxes, interest rates, the environment, and more. Depending on whether these changes help or hurt companies or industries, they can make share prices go up or down. For example, if there’s a change in tax rates or environmental rules, it can affect how much money companies make, and that can impact their share prices.
- Demand & Supply : When many people want to buy a stock but there aren’t many available, the stock price goes up. On the other hand, if not many people want to buy a stock, but there are a lot of them for sale, the stock price goes down. This is a basic rule that works in any market—it’s called the law of supply and demand.
