It is common knowledge that investing in the stock market can fetch you high returns. However, the contrary is also true. Missteps or mistakes in your investment strategies can cause you to lose your capital. This is due to the fact that the stock market is a highly volatile environment, where the share prices are constantly fluctuating. And when it comes to the stock market, there are several factors influencing share prices. Here’s some information on some of the most important factors affecting share prices in India, which can help you understand stock price movements better.
Factors affecting share prices
While there are numerous factors influencing share prices, briefly explained below are some of the most crucial and decisive factors that cause stock prices to move up or down.
Demand and supply
The stock market is designed to work on the age-old economic principle of demand and supply. These are the two factors that drive the price of a particular stock. When the demand for a particular stock exceeds its supply, it effectively means that the number of buyers for the stock are more than the number of sellers. This invariably leads to a rise in the price of that particular share since it signifies that the buyers are more than willing to shell out money to purchase the stock.
The converse is also true. When the supply for a particular stock is more than its demand, it essentially signifies the presence of more sellers than buyers. This drives the price of a stock downward since it indicates that the sellers are trying to get out of the particular stock, selling it at whatever price the buyers are willing to part with.
The financials of a particular company are often termed as fundamental factors. And the financial performance of a company is one of the most important factors affecting share prices in India. Investors will often overlook companies with weak financial performance, thereby leading to a downward spiral in the stock price. Also, traders and investors looking to generate wealth always tend to gravitate towards companies with exceptionally strong financials, which then consequently leads to an increase in demand for that particular stock, thereby driving the prices up.
Most investors tend to discount the impact of the current economic climate when predicting the price movement of shares. The state of the country’s economy and the developments in the global economy are one among the many important factors influencing share prices. Stock markets are not only made up of domestic investors, but also involve a significant number of Foreign Institutional Investors (FIIs) as well.
When a country’s economy shows signs of a slowdown, it discourages further investments from FIIs. Additionally, depending on the severity of the economic climate, it might also prompt FIIs into selling off their shareholdings and moving their investment into other more stable economies.
The policies of the Government are often considered to be major factors affecting share prices in the stock market. If the policies announced by the Government are perceived as favorable by the investors, the share prices of the associated industries and sectors tend to rise. However, unfavorable policies, especially those that are concerned with taxation, can cause investors to lose faith. This subsequently prompts a sell-off, which can quickly put the share prices in a downward spiral.
While this might seem like an innocuous factor, in reality, it is far from it. Investors always try to stay away from investing in countries going through political uncertainty or turmoil, since such a scenario significantly increases the risk of their capital being eroded. Also, any major shift in the internal political scenario can, in the short-term, dictate the price movement of the shares in the stock market.
Although minor, declarations of dividend are meaningful factors affecting share prices in India. This is something that can be easily identified in the price chart of a particular stock. Typically, the prices of a company’s stock tend to rise upon the declaration of dividend. The reason for the rise in the share price is because investors generally perceive companies declaring dividend as being financially strong and stable. However, if the declaration of dividend by a company does not meet the expectations of the investors, it increases the likelihood of the share price going down.
This list of factors affecting share prices are merely indicative and are not exhaustive. Another important factor that is capable of driving the share prices of companies is the overall market sentiment. Unlike most other factors, this one is purely emotional. If the market sentiment is bullish, the share prices will invariably go up. In the event of a bearish market sentiment, the prices of shares will most likely come tumbling down. Before you decide on your next trade, it’s prudent to consider these factors to get a better idea of how the market may move.