4 factors that move stocks
4 factors that move stocks
There are many reasons and factors that may determine when a stock goes up and when it goes down. This volatile nature of stocks makes it difficult to predict with certainty when stocks will rise and when they will fall. It may relate to a meeting of shareholders, or fluctuations in the levels of supply and demand, and so on.
What are the factors that move stock prices?
Almost all daily events can affect the rise or fall of a stock. The market is nothing but a reflection of the corporate image in society, and fluctuations in prices are nothing but a representation of our volatile ideas of value as human beings.
Stocks work just like the interest rate policies of the Federal Reserve, geopolitical events like wars and boycotts, and even factors like innovation and technology like the hype surrounding cryptocurrency right now. When investors are worried about something, that drama is transmitted to the stock market where we can watch it through the fluctuations in prices.
Here are 4 main factors that explain when the stock goes up and when it goes down:
1- The main factors
The two main factors that control when the stock goes up and when it goes down are the profitability and valuation ratio. “Profit is the end result of many sub-factors such as the strategy adopted by the company and the efficiency of management...The valuation ratio is the relationship between a particular financial metric such as profits, revenue, cash flow and the market value of the entity,” says Juan Pablo Villamarin, CFA and Senior Investment Analyst at InterContinental Wealth Advisors.
The most well-known metric is the price-to-earnings ratio, which refers to the ratio of a company's share price to the earnings earned on each share. Investors use these ratios to compare the performance of similar companies with the records of one company in terms of actual and projected profits.
2- Technical factors
Technical factors are the things that affect supply and demand, but their impact on cash generation prospects is fairly small. Take a stock split as an example, if Company XYZ is trading at $100 per share with a total enterprise value of $100 million and then offers a 1-2 stock split, the shares will trade at $50 but the total enterprise value will not change due to the low number of shares available now.
Technical factors that influence when a stock goes up and when it goes down might include the times of the day or days of the week that the trade is traded compared to other days and times, or even comparing the price movement of one stock to that of another stock in the same industry.
These technical factors are very important since they give an insight into the supply and demand dynamics of the stock, i.e. they may reflect some factors and predict the future demand for the stock.
Stock prices are generally affected by everything that happens around the world, and we can never deny the huge drops that the stock market experienced during the COVID-19 pandemic.
The trick behind predicting when a stock will rise and when it will fall may lie in deciphering the news, as the latter is able to change the supply and demand in the short term for the stock, in addition to it can change the probability of the company's ability to generate future cash flows which affects prices significantly.
4- Market sentiment
Sentiment generally refers to the driver behind demand, which affects supply as well. Market sentiment or investor sentiment is used to describe market expectations with respect to parts of the financial market metrics, and it is a very important factor, as the forces of supply and demand are critical to the movement of stock prices in the medium term.
There are several theories that attempt to influence market sentiment on the supply and demand of stocks:
Behavioral Financial Theory: This theory is concerned with psychological factors when analyzing financial markets. Many investors act based on their feelings, whether positive, such as excessive confidence, or negative feelings, such as anxiety and panic, which leads to making biased investment decisions at times, and thus condemning your continued failure.
Animal spirit theory: This theory posits that people act on instinct in situations of uncertainty, just as animals do. Investors buy when the market is good, and sell when market conditions are bad, indicating the power that instinct has over the decisions taken.
In periods of greed, investors believe that stock prices will continue to rise, prompting them to pay increased prices for shares, but this greed soon turns into fear, as investors realize that expectations are getting too high and then sell.
We can gauge market sentiment using the CBOE Volatility Index (VIX), or the “Fear Index”. The higher the VIX, the more fearful the traders will be, and vice versa.
Don't let your emotions take over for you. Keep in mind that you are in the safety zone as long as you are armed with sufficient knowledge and careful research about the past and potential performance of the stock before buying anything.
And remember that despite the volatility of the stock market and the risks involved, investing is a great way to build long-term wealth. Try to invest smartly with a strategy that fits your financial goals, stay focused on your long-term goals, and avoid making hasty decisions based on feelings of panic and fear that you may have.