As we have understood so far, being a trader means you must be able to efficiently track the rapid ups and downs in stock prices to make successful trades without losing track. For this, it is very important that you understand the underlying factors that can lead to any swift movement in stock prices.We all know that the most basic factor causing the stock movement is its demand and supply dynamics. The higher the demand, the higher the price and the lower the demand, the lower the price. However, various other factors also contribute to these fluctuating prices. These could be any of the factors including company’s fundamentals, sector outlook, prospects, and even macroeconomic conditions.However, it is important to note that different factors come into play in different situations. For example, in the long term, the company’s fundamentals act as a major factor in the movement of its stock. The company’s earnings performance, profit and loss, cash flow, debt, etc, come into force in the long term.
Let's quickly look at some other factors responsible for share price movements:
Fundamentals
A study of a company’s fundamentals helps to reveal the intrinsic value of its shares. The company’s worth and its shares’ fair value can be recognized with the fundamental analysis. This value can be arrived at after considering factors such as its earnings, net assets, industry, and others.Once you know the fair value of a stock, it is important to compare it with peers or industry to understand whether it is overvalued or undervalued. As we have already studied, investing in undervalued shares can be profitable and it is called value investing -- a philosophy championed by billionaire investor Warren Buffett, who chooses stocks based on their overall potential.
Earnings
A company’s present and potential future earnings influence its stock prices the most. If the company is expected to perform well and is likely to see growth in financial metrics, its stock prices may go up. The impact of past performance and the expectations of future earnings are already factored in the current market price of the share.Any change in earnings expectations has a significant impact on the stock price. If a company’s financials beat analyst estimates, its share prices tend to go up. If the earnings are below estimates, the share prices can decline.You can spot an opportunity to trade in the difference between analysts’ estimates and the company’s actual performance. It is important to understand how the stock will react to the earnings announcements.
Market sentiment
The general investor sentiment prevailing in the market also has an impact on the share prices. This mood can be for a particular share or the entire market. However, it is subjective. You have to understand the state of the economy or industry and the general sentiment in the market on it. You can try to cash in this sentiment wave which drives the stock prices.
Seasonal factors
Seasonality can also have an impact on stock prices of various sectors. For instance, the monsoon season in India drives movement in shares of different sectors. Better monsoon leads to a good harvest for farmers in rural India. With higher income, rural spending increases which raises the demand for consumer goods. The rural economy facing stocks and those in the agriculture sector tend to gain and move higher. On the contrary, a bad monsoon tends to have a negative impact.
News Alerts
As we saw earlier, certain types of news have a great impact on share price movements. This can include not just the company’s internal developments but also external factors. For instance, rising rubber prices will impact the performance of Tyre stocks.You can use these price fluctuations driven by news as an opportunity to trade. Quickly assessing the impact of any news development on the company or the sector is crucial.
