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How Are Stock Price Determined

A company’s worth is represented by its proportionate and relative value stock price. As a result, it simply shows a percentage change in a company’s market capitalization at any particular period.

Any percentage change in the price of a stock in share market today will result in an equal percentage change in the company’s market capitalization. This is one of the primary reasons why stock prices are so important to investors; a minimum reduction in the stock price, for example, might result in a maximum loss for a shareholder with a massive amount of shares.

What are the Direct Influences on Stock Prices?

Micro and macroeconomic factors influence a stock’s price. Last year, for example, costs of hotels, aircraft, and other associated stocks fell due to the government’s travel restrictions and control measures to contain the spread of the Covid-19. However, with the reopening of the economy, the lifting of travel bans, and the authority to reopen tourist destinations, the majority of them have begun to increase. For example, between the country’s lockdown in January and May 2020, a hotel saw its shares plummet about 70%. However, starting June 2020, stocks have surged over 50% due to news of intensified immunization campaigns and the government’s reopening of the economy.

So, if you’re a first-time investor seeking to make a stock market investment, you should be aware of stock market basics so that you can better schedule your investment.

Liquidity:

Investors and traders determine the price of a stock in share market today. On the other hand, their impact is mainly determined by their fundamentals or market conditions. If the market is rising or a specific sector is trending upward, all stocks in that sector will also increase. Similarly, the price movement is influenced by the volume of shares available for trade. Due to a lack of liquidity, a few equities in the market may have a little movement in their values. There aren’t enough buyers to fill the pending sell orders. For example, an IT company saw its stock prices fall due to a lack of buyers for all sale orders issued.Changes in government policy and regulation:

The stock market is also affected by government policy or regulation execution changes. Budget announcements from the government, for example, might affect the entire stock market or individual industries. For instance, if the government raises foreign direct investment in the insurance sector, all listed insurance stocks will react quickly.

Regulatory changes, on the other hand, will affect the stock price. For example, if SEBI, the market regulator, makes an announcement favouring investors, stock prices may rise.

Observations by Management:

Stock prices are influenced by a company’s management profile and leaders’ experience.
Therefore, a management comment or announcement could affect the stock price immediately. For example, if a company’s management decides to raise product prices, the stock price often rises due to the company’s potential revenue gain. As a result, financial performance could improve, potentially leading to increased dividend payments to shareholders.

Scenario: Political

A new political party to gain power and form a government on stock prices and the broader market. Similarly, a change of political party in a foreign country that results in a change in government might have an effect. This is because regulatory and economic reforms could benefit both businesses and individual investors in both circumstances.

Disasters caused by Mother Nature

People become terrified when natural disasters occur. This aspect causes a market crash. Fearing that they would lose money or need money, shareholders sell their stocks, causing the market to correct its price. For example, due to the surge in Covid-19 cases harming the (Indian) economy, foreign institutional investors are withdrawing their funds from overseas markets.

Additional considerations

Aside from the reasons described above, other internal elements influence a company’s stock prices. For example, dividend announcements, bonuses, rights, or the spilled of a share are examples of causes that cause prices to climb for a short period before correcting or vice versa.

Similarly, any rumour or insider information about a company where fraud or a likely default is suspected could negatively impact stock values.

The stock market will be affected by merger and acquisition deals as well. However, the impact of the adjustment will be determined by how it benefits the company’s future growth and shareholder value.

Conclusion:

It’s crucial to grasp stock market basics before learning how stock values are established. This is because buyers and sellers work together to decide stock prices in the capital markets. Numerous variables and hypotheses explain why stock values fluctuate, but two of the most commonly mentioned explanations are included here.

 According to the Efficient Market Hypothesis, a company’s actual value at any given time is reflected in its stock price. However, according to the Intrinsic Value Theory, companies may trade for more or less than they are worth.

 

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