I remember a good friend coming
to me one day all excited because according to him, one of the banks he owns shares
in had announced that they had added 3 new branches to their growing branch
network. He was excited because according to him, this means the price of the
shares is about to increase and he will profit from it.
While my friend may not be
totally off the mark in his believe, this is one area which most people find
confusing. I keep getting asked this question: “what makes stock prices to
increase or decrease?”
To be sincere, the answer to
this question can be as simple or complicated as you want it to be. The simple
answer to that question is this – “Demand
and Supply”. If the demand for a particular stock (i.e. the volume
investors are willing and able to buy) is higher than its supply (i.e. the
volume investors are willing and able to sell), the price of that stock will
increase, all other things being equal. That is what accounts for price changes
in a stock.
A more detailed answer to the
question can however come in this form. Prices change due to:
1.
Activities
of institutional investors: Institutional investors (i.e. companies
such as banks and mutual fund companies which invest in other companies) are
usually responsible for changes in the price of stock. This happens because
they normally transact business (i.e. either buy or sell) in large volumes,
leading to the exertion of significant pressure on the share prices. For
example, if a mutual fund company owns the majority shares of another company
and decides to offload or sell all of those shares on the open market, there is
a great likelihood of the price of those shares coming down. The reverse of
this is equally true. Individuals who own large chunks of shares in a
particular company also have the ability to cause price movements.
2.
Dividends
or Earnings of the stock: Another factor which usually elicits
enough price response from the market is Dividend or Earnings announcements.
This is especially true of companies who are perceived as “dividend paying
companies”.
3.
Market
expectation: Generally, the expectations of market
participants also cause price movements. An example of this is the story of my
friend which I started the post with. So for example, if a large number of
people believe that the price of that stock is going to increase as a result of
the branch expansion, it is very likely to result in an increase in the price
of that particular stock. This is because those people will increase their
demand for that share.
Finally, I want to say that ultimately,
it is investors’ sentiments and expectations which carry the greatest weight.
That is what actually drives the market.
Author:
M.D. Avor
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