Learn what factors affect share prices, causing the share market to go up and down.
As anyone who owns a share portfolio can tell you, the share market is volatile and has a tendency to go up and down, often.
Regardless of whether you have shares or not, understanding some of the factors that can influence the share market to rise and fall is critical.
Why? Because if you want to invest in shares, you need to learn to have nerves of steel and understand that share prices can be affected from even the slightest of things. Essentially the share market is made up of supply and demand. If people favour a particular stock or company, they want to buy shares in it. This drives the demand up and in turn the price up also.
This means that if a company is not in favour, the price can also fall, as people opt instead to sell their shares due to not seeing a future prospect for that particular investment to go up (or they just need the cash).
Anyways, I deviate from my original point. If you want to invest in shares, it helps to know the factors that can affect the price of shares. Remember, sometimes prices can change without substantiation or logical reason, it could just reflect the demand of shareholders who are making decisions that do not reflect the true status of whether the investment is a good one.
Real factors that affect share prices
The sector the company operates in may be slowing or have news
For instance, imagine the Australian Government decides to tax banks more than other companies by increasing their tax rate. This would result in less earnings for the bank and may cause people to be wary of shares in the banking industry for a while.
The company might issue MORE shares to the public
Often referred to as a ‘stock split’, this is when a company issues more shares in the company to the public, creating more supply than there is demand (in most cases) which results in their being an over supply of shares in the market. This will generally lower the price.
The ex-dividend rate
Shares often pay a dividend (part of the company earnings which are returned to investors as ‘income’). The way this works is that any shareholders up until a certain cut off date become eligible for a slice of the dividend profits, this is called the ex-dividend date.
How it works; often investors come in at the last second, buy the shares before the cut off date (ex-dividend) and become eligible for the dividend payment (income) with intent to sell the shares straight after they receive this ‘income’. This can cause the share price to drop as investors offload their shares after the income is paid.
Strong competitor results
Sometimes if a competitor releases strong earnings, the share price of the opposing competitor can lower. This is due to people opting to invest in the opposing company that has strong results in the belief it will outperform their current shares.
For instance, you might hold shares in Woolworths but see that Coles (owned be Wesfarmers) released a really strong earnings report. You opt to switch from Woolworths by selling them and re-buying into Wesfarmers.
Other factors that can affect the share price based on business information
Companies may be partaking in some of the following activities, stirring market interest or disinterest in their shares.
Mergers, acquisitions of other companies, increase or decrease in demand for their products, expansion and growth, management changes, positive reviews of the company (or negative reviews) and more.
Other factors that can affect the share price unnecessarily
Rumours can mislead people in share markets
Sometimes a simple rumour can cause the share price to drop. Take for instance in the UK, the Manchester United soccer team (which is a company) had its shares drop 9% in a matter of minutes due to unsubstantiated rumours that they were going to buy a very expensive player, in turn making people question how much money they would have left to run the company.
Much the same as shares in Apple, famous for the iPod and iPhone. Each time they hold a big press conference, the price of their shares go up due to people suspecting the imminent release of another game changing product that will lead to bigger earnings for Apple.
News and media correlates to share price often
Often the average investor wakes up and reads one of the morning papers, either online or in print version over a cup of coffee. If the media beat up a company in the finance section, it can quickly reach thousands of people who may be shareholders, resulting in people heading into work and potentially selling their shares based on what they read.
This also applies to people buying shares. If a mass audience reads a favourable financial piece on a company and recommends that they buy it, they may just do so.
Natural disasters can make shares plunge
Disasters like earthquakes in Japan or flooding in the US can have disastrous affects on the share market. People often escalate into a mode of panic when natural disasters occur and in turn sell their shares or become slightly risk-averse.
This is likely due to market sentiment evaporating and people opting to not invest, instead pooling their money while the natural disasters unfold for quick access to money or simply because investing isn’t high on their radar just yet.
World events and political factors can change opinion
A change of Government. The disastrous September 11th incident in New York. Big events of a political nature can cause shares to rapidly lose value. This is because it causes investors to opt away from the share market, reducing demand and in turn share prices.
The share market had made people rich and made people poor
Remember, the share market is complicated. It’s a very very complex system that even the financial experts fail to understand in many instances. Always seek professional advice before investing and of course, only invest what you are comfortable with risk wise.
If you haven’t read it already, you must read our previous post on making sure you can sleep at night with your investments.
So tell me, do you own a share portfolio? Did you get a ‘hot tip’ on a stock to buy from a taxi driver one night? Tell us some of the factors over the years that affected the price of your shares.