What Determines Demand for a Stock?
Demand for a stock is based on a variety of factors. The organization behind the stock is responsible for the financial information that reports if the company is achieving its goals. This financial information also drives the company stock's price and the demand for the stock. When markets are on a steady rise, it's possible for a stock price to increase steadily to a point where the price of the stock may be overvalued. The opposite can also occur; a stock price could fall in a declining market and the stock may end up undervalued. These market events also affect the stock's demand. The types of investors and types of investments they are seeking also affect which stocks are in higher demand that others.
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Company Earnings/Fundamentals
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A company performing well tends to have a stock that is in high demand. A company's fundamental financial information includes its earnings, assets, liabilities and the cash flows it generates and uses. This is the primary information that affects a stock's price and also its demand. It's important to also note the accuracy and validity of the information presented since inaccurate financials can present a picture of success and growth where there is none. News reports of companies that misrepresent themselves show how the demand for their stock quickly declines.
Payment of Dividends
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The payment of dividends can either interest or dissuade investors in buying a stock. Investors seeking a regular income stream will demand stocks that regularly pay out their earnings in the form of dividends. Investors who seek a company focused on growing its business tend to have less interest in dividend income and instead seek companies that reinvest their earnings in the business. These growth investors have less demand for a dividend-paying stock.
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Economic/Company Announcements
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The general state of the economy, along with company events, affects stock demand. Economic indicators, such as changes in gross domestic product, rising/falling interest rates and rising/falling income tax rates can all impact stock demand. Company announcements, such as reports on earnings, legal claims and changes in top management, can also affect stock demand. The release of positive indicators can boost stock demand and price. Negative indicators will have the opposite effect.
Changes in the Market/Sector
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A stock market with rising stock prices (bull market) has a tendency to drive up stock demand as investors buy stocks to avoid a higher price in the future. A stock market with declining stock prices (bear market) drives down stock demand as investors sell off stocks to decrease their losses. Factors affecting a company's sector can also affect the demand for its stock. For example, the rising price of gold will add pressure to a jewelry manufacturer to meet earnings expectations. If earnings fall as a result of higher costs, the demand for the stock will most likely also fall. If the price of gold drops and sales increase, demand for the stock may rise.
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References
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