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What
Influences Share Price?
We
all recognize stocks cost money, but what determines the price?
Why can two stocks that cost the same amount have completely
different fundamentals?
What factors dictate what a stock sells for?
In the simplest terms, supply and demand, and what
a buyer is willing to pay or a seller is willing to accept
are the ultimate arbiters of stock prices, but there are a
number of other factors that play into stock valuation.
Prior to the past few decades, stock valuation
was somewhat easier to determine, but even then there was
no hard and fast formula that could be calculated to give
you the share price of a stock without exception.
Decades ago share price was roughly the current year’s
earnings, times a multiple for the industry the company was
in. Determining
stock price now is even more difficult given the fast paced
markets, the greater number of individual investors owning
stocks, the use of computers by individual and institutional
investors, the habit of investors to look further out than
just the current year’s earnings, and the rapid pace in which
new technologies are introduced by publicly traded companies.
Many
components influence the price of a stock.
Corporate earnings are the most influential factor
in determining a stock’s price.
If owning a share of stock is holding a small percentage
interest in the company, then positive earnings growing at
a nice clip is a sure way for your small interest to increase
in value. Events
that increase or decrease earnings will affect share price
in a similar fashion.
Products effect earnings and share prices.
Innovative products, brought to market ahead of competitors
are a Godsend. Product
delays, a new competitor, or product failures that get the
attention of the media can all reduce earnings and decimate
the share price. Miss
your earnings estimate by 1 or 2 cents per share and you’re
in big trouble. Exceed
it by the same amount and you become the stock of the day,
running up as much as 10 or 20 percent.
Changes in management can affect share price.
The unexpected departure or untimely death of a key
employee or company officer can make a stock drop like an
anvil pushed from a plane at 30,000 feet.
In the same way a “name” executive joining a firm can
move a stock higher.
An analysts’ upgrade or downgrade of a stock can significantly
impact a stock price.
Favorable analysts comments get the sales people at
the analysts’ firm pushing the stock to the firm’s customers,
and negative analyst comments have the opposite effect.
Upgrade or downgrade the sector a stock is in and it’ll
be swept along with all its peers, whether the sector comments
fit the individual stock or not.
There is guilt or glory by association if a similar
stock in the same industry receives positive or negative comments
by the media. General
market conditions can influence whether a stock carries a
deflated or premium price.
Stock price can also be affected by how a company uses
press releases and the media.
Two identical companies, one that releases frequent
press releases of even menial positive events, will perform
much better in the market than the other company that rarely
provides news of company events.
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