Introduction
The market, where seller supply and buyer demand are balanced, determines stock prices. But have you ever pondered about the forces that influence a stock's price, or what propels the stock market? Regretfully, we are unable to accurately predict how a stock's price will move using a simple equation. Still, there are certain things we do know about the factors that influence a stock's rise or fall. Three groups of influences can be identified: sentiment in the market, technical variables, and fundamental factors. What factors have an impact on Stock Prices? Primary variables influencing stock prices are: 1. Fundamental Aspects (news and performance of the company) Fundamentals—basically, a combination of two terms—would be the main factor influencing stock prices in an efficient market. An earnings foundation, like profits per share (EPS), A valuation multiple (P/E ratio, for example) The value multiple articulates future expectations. It is essentially predicated on the discounted present value of the future profits stream, as we have already described. Thus, the two crucial elements in this case are: The anticipated expansion of the base of profits The stock will provide a larger multiple if its growth rate increases, but a lower multiple if its discount rate increases. In brief, the following are the essential fundamental factors: 2. Technical Aspects It would be simpler if stock prices were solely determined by basic factors. The combination of outside circ*mstances that change the supply and demand for a company's shares is known as technical factors. Technical factors include the following. Industry Trends: The performance and trends within particular industries or sectors have an impact on stock market trends as well. The profitability and future prospects of businesses operating in certain industries can be impacted by variables like the dynamics of supply and demand, shifting customer tastes, and changes in regulations. Market Liquidity: Market liquidity is the degree to which assets can be purchased or sold without materially altering their price. Reduced liquidity may lead to wider bid-ask spreads and increased price volatility, which could have an impact on stock prices. Technological Developments: New technologies have the power to upend entire sectors of the economy and open up fresh investment opportunities. Businesses that use developing technology have the potential to grow quickly, draw interest from investors, and see an increase in stock price. Substitutes Businesses fight with other asset types for investor dollars globally. These consist of international equities, commodities, corporate and government bonds, and real estate. Although it's difficult to measure, the demand for US stocks and their alternatives is closely related and has a significant impact. 3. Investor Attitude The mood and confidence of investors can influence market movements. Stock prices may rise or decrease as a result of this. There are two categories of market broad descriptions: A bull market is a robust stock market in which investor confidence is building and stock prices are rising. It is frequently linked to both investment optimism and an economic boom or recovery. A bear market is a bad market in which investor confidence is eroding and stock prices are declining. It frequently occurs in recessionary economies with high rates of unemployment and rising costs. 4. Economic aspects The value of a single stock or the stock market as a whole can be impacted by a number of economic factors, including: The inflation rate Not only was inflation a factor in the valuation multiple that we discussed previously, but it also plays a significant role from a technical standpoint. Low inflation historically has been strongly correlated with values (high inflation drives low multiples and low inflation drives high multiples). Deflation Declining prices typically translate into fewer corporate profits and a slowdown in the economy. Investors may start selling their stock and switching to fixed-income instruments like bonds if stock prices decline. It may be possible to cut interest rates to entice additional borrowing. The objective is higher economic activity and consumption. One of the worst deflationary periods in history was the Great Depression (1929–1939). Interest rates: The Reserve Bank of India (RBI) controls interest rates, which has an immediate effect on stock prices. Businesses can borrow large amounts of money at lower interest rates during low interest rates, which increases their earnings by increasing the value of their stock. Higher interest rates, however, have the opposite effect on profitability and stock value. Exchange rates For multinational corporations, particularly those that primarily rely on foreign markets, changes in exchange rates can have a significant impact on their overall financial performance as well as their sales, profits, and competitive stance. Investors keep a careful eye on these swings and evaluate how they can affect a company's profits and stock price. Businesses that have a diverse global presence and clearly defined currency risk management policies may be better able to handle the difficulties presented by currency fluctuation. Demand and supply The two fundamental ideas that underpin the entire economy are supply and demand. Additionally, they are essential to the capital markets. One of the key factors impacting the stock market is the mismatch between supply and demand, which raises or lowers the price of stocks. Stock value fluctuations are also a result of factors influencing the demand for equities, such as interest rates and economic data. Changes in economic policy A new government may choose to enact new laws once it takes office. These modifications may or may not be beneficial to business. They could result in adjustments to interest rates and inflation, which could have an impact on stock values. Decisions made by the government on taxes, rules, and spending have a big impact on enterprises. While unfavorable policies can raise uncertainty and have a negative effect on market mood, good policies can spur economic growth and increase stock values. For instance, the monetary policy measures made by the RBI, such as adjustments to open market operations and cash reserve ratios, have an impact on the liquidity of the banking system, which in turn has an impact on the liquidity and performance of the stock market. 6. Global Events Uncertainty in financial markets can be brought about by geopolitical events like trade tensions, hostilities, or economic disasters. Stock market volatility may result from cautious or risk-averse investors. Conversely, positive occurrences throughout the world can increase investor confidence and result in market gains. For example, in 2022, the war's political unpredictability, rising interest rates, and oil prices all contributed to global share market volatility. 7. Political Aspects: Stock market fluctuations are greatly impacted by political developments. Business confidence indexes for such enterprises are low in unstable political environments, and finance and investments may be scarce as a result. There is a chance that foreign investors will withdraw. In the event of a conflict, a weak administration, public dissatisfaction, etc., for example, stock prices tend to drop. There is a direct correlation between market volatility and stock prices, and elections and budget announcements. The Final Word It's critical to comprehend how these elements operate before opening a demat account in order to begin your investing journey. Every element has a significant impact on how stock prices move, from global events that send shockwaves across markets to economic data that show the state of the country's finances. It takes a combination of information, analysis, and human psychology understanding to successfully navigate this complicated terrain.
The present value of the future earnings stream is computed using the discount rate.
