What Influences Stock Prices?
Just about anything can influence stock prices, and history is full of examples of rumors or a seemingly insignificant product bringing down national markets—the Danish tulip craze is a classic example. The stock market is notoriously volatile, especially because a lot of traders make money by speculation and frequent bulk transactions that profit off of small fluctuations. Business performance, commodity prices, long term interest rates and government decisions are some of the main factors in stock price fluctuation.
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History
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Financial products similar to stock—and the agents and marketplaces that deal in them—have been around since before the Industrial Revolution. Italian merchants used to raise capital to outfit ships by selling shares in the future profit of the cargo’s sale. Similar to today’s stock market, investors were attracted to these shares because ships returning to Italy with a cargo of spices and silks sold the cargo for many times more money than the cost of supplying an outgoing ship. However, these journeys took anywhere from one to three years, during which many ships were lost due to storms, disease, pirates and other dangers. Hence, these investments carried a high risk of failure in exchange for the possibility of high profits, similar to the stock market today.
Stock and Stock Prices
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Stock is the initial capital that a company has. When a company goes public (meaning ownership moves from a closed and private group of individuals to whoever wishes to buy a share), it splits this capital into units called shares and auctions the shares off. Share prices are, at the most basic level, determined by a company’s existing assets (the value of the stock that the company already has) and expected long-term profits.
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Business Performance
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Expected future profits are, in essence, what underlies any given company’s share price. Any change in those expectations—good or bad quarterly profits report, an increase in raw material prices, acquisitions—changes stock price. Even rumors about a profits report can significantly change the price of a share.
The Role of the Government
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Governments are in charge of regulating markets and hence government decisions often affect stock prices in drastic ways. Increased regulation almost always sends industrial stock down, since it usually means more money put aside for safety and environmental measures and therefore less going into the profit report. Likewise, minimum wage increases mean that companies will have to spend more on their lowest-paid workers. Other decisions, like tax cuts or credits and stimulus money send stock prices up because such decisions imply both more money on profit reports and more money being invested in the business.
Other Factors
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Plenty of other factors influence the stock market as well. Interest rates are essentially the price of borrowing money, which means low rates encourage borrowing, most of which is invested. Investment sends stock prices up in the hopes that these investments will develop stronger businesses and thus more profit. War and natural disasters tend to wreak havoc in the stock market (except for those businesses specializing in security or clean-up). Fluctuations in currency exchange rates and commodity prices also have a strong effect on the stock market.
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