What Affects Stock Prices?

Stock prices are influenced by a variety of factors.

Playing the stock market can be very lucrative, but profits do not come without taking risks. To improve your chances of making money it is important to research the market and the particular stocks you are interested in. Some important factors to take into account include dividends, industry trends, world events, momentum, and corporation-specific factors.

Dividends

Most corporations that are in a low-growth stage will pay dividends because there are not as many projects in which to reinvest earnings. There are two things a corporation can do with their profits: add them to retained earnings or pay them out as dividends. This means that retained earnings will be decreased by the amount that is paid out in the form of dividends. On the date of record for a dividend, the price for a share of stock will generally decrease by about as much as is paid out per share in the form of a dividend.

Industry Trends

Industry trends can affect the future expectations of stocks. Industries, such as the alternative fuel industry, are expected to grow in the future. It follows that companies within these industries are also expected to grow. As a result, the present value of future cash flows from a particular security, which dictates the prices of securities, will increase. This means the stock price will increase. The same is true of industries that are dying off; stock prices will fall because there is uncertainty as to how long the company will remain profitable.

World Events

World events can have significant impacts on stock prices. In general, they are major events and have only a one-time impact on prices. One of the most common types of world events is a natural disaster. Hurricanes, tsunamis, and unexpected frost all impact the prices of stocks. There are so many unique types of world events that it is impossible to determine a direct correlation between stock prices and all world events. In general, though, a positive event is going to help stock prices, whereas a negative will cause a decline in stock prices.

Momentum

Momentum is a factor that can be a double edged sword. In most situations it is true that success begets success, although judging future success based on current success can be difficult. This makes momentum hard to factor into a stock price. If a price is on the rise, it may have the momentum to continue building. Conversely, a stock that is falling may continue to fall. The trick with momentum is knowing when it is running out--at this point you need to liquidate your position in a stock and take your profits.

Corporation Specific Factors

Events within a corporation have a huge impact on stock prices. These events can include the hiring or firing of a CEO or other executives, layoffs and store closings, and market scandals. Sometimes multiple corporation-specific factors go hand in hand, so if one happens it is important to be cautious for other events that occur as a result.

References

• Stock Price Factors
• Momentum Investing