What Factors Affect a Share’s Price?

What Factors Affect a Share’s Price?

Share prices can seem to fluctuate rather unpredictably at times, but there are several factors that influence whether a share price rises or falls. Here we take a look at the key drivers behind share price movements.

Here are some of the factors that can affect share’ price:

1. Supply and demand are the primary factors that directly affect a share’s price. When a share has more buyers than sellers, the price will rise because people will outbid each other to access the limited supply of stock. Conversely, the price will fall when there are more shares in issue than are demanded, and people will sell at lower and lower prices to entice buyers.
2. The revenue and earnings a company generates, along with its profitability from the production and sales of goods and services also impact its share price, as a share’s price reflects the future stream of dividend payments which is impacted by a company’s profitability.
3. The price may also be affected by the behaviour of traders and investors in the market and their expectations. This can be unpredictable and sometimes bewildering due to seemingly irrational behaviour. Traders and investors can create or follow trends which seem to have little basis in a company’s fundamentals. A good example is the frenzied trading of GameStop Corporation in the US in 2021 where, powered by online hype, the share price rose dramatically and then fell dramatically. Many small-time investors got caught up in the mania, buying as it peaked prior to the price falling, and unfortunately they lost a lot of money.
4. Share prices remain stable, with minimal price movement, if supply and demand are equal. When one factor outweighs another then abrupt price changes may be expected.
5. When the number of shares in a company are limited, the company may issue new shares to buy in the market. If many investors try to buy these shares, and the supply is low, it will drive the share price higher.
6. A company can buy back its shares from the market and reduce the number of shares available. This reduces supply and can cause the price to increase.

There are also other external factors that will affect share prices indirectly, these include:

• Movements in interest rates
• Changes in a government’s economic policies
• Inflation
• Deflation
• Changes in company, market or sector sentiment
• New industry trades
• Global economic and market fluctuations
• Unforeseen natural disasters

As always, undertaking sufficient research and taking professional financial advice is highly recommended. A good financial advisor or broker can help you determine the price of shares more accurately and help you to trade effectively.