16 Important factors that influence share prices

Important factors influencing share prices

The following are the factors that influence share prices

1. Demand and supply

Demand and supply of securities influence price of securities. If the demand of securities is more than the supply (buyers are more than the sellers), prices of securities increase. On the other hand if the demand of securities is less than the supply (buyers are less than the sellers), prices of securities decrease.

2. Bank rate

In case of lower bank rate (lower interest rate), the demand for funds would be higher and the demand for securities would he high. Whereas in case of higher bank rate (high interest rate). the demand for funds would be lower and therefore the demand for securities would be lower.

3. Market players

Security prices are influenced by the market players. If the number of bulls are more than the bears, then the prices of securities would increase. On the other hand, if the bears are more than the bulls, the prices of securities would decline.

4. Dividend announcements

Dividends act as a signalling device for share price movement. Dividend announcements influence share prices. If companies announce dividends, generally share prices of those companies tend to increase. An important point to note is, if the rate of dividend announced is less than what was expected by investors, share prices would decline, whereas if they are up to are more than expectations. share prices would increase.

5. Management profile

Management profile significantly influences success of companies and therefore they have an important influence on share prices. If the management comprises of educated, experienced professionals with a successful track record then share prices would be higher. In case the company is taken over by a management having a poor reputation then the share prices would fall.

6. Trade cycle

Trade cycles refer to cyclical fluctuations in economic activity. During boom conditions the share prices would be at their peak and during depression they would be at their lowest point. Share prices would gradually increase during recovery conditions and would fall during conditions of recession.

7. Speculation

In case speculation in the market is high or in case speculation in a stock is high, then the price of that share would be showing high fluctuations. In case speculation is at a low level then the fluctuations in share price would be lower.

8. Political factors

Political factors such as ideology of the party in power, policies of the government, relations with other countries influence share prices. For e.g. when the UPA government won elections, share prices fell to a great extent because it was felt that the government policies would be influenced by the communist parties.

9. Industrial relations

In case there is good relationship between the workers and the management of a company, the productivity would be high leading to better profits. Therefore share prices would be higher. In case of companies where industrial relations are poor and strikes and lockouts occur regularly, performance of the company would be poor. Therefore share prices would fall.

10. Stability of government

When there is a stable government, businessmen feel confident to invest in new businesses and expand existing businesses. Production, sales and profits are higher and consequently share prices would increase. In case of instability in the government, new investments do not take place. Demand, production and profits are lower and share prices fall.

11. General market sentiments

It is generally said that sentiments move the markets. If there is optimism among market players, more buying would take place leading to increase in share prices. In case market players are pessimistic, then more selling would take place pushing down share prices.

12. Actions of institutional investors

Share prices are influenced by Institutional investors such as mutual funds, investment trusts, pension funds etc. They have large amount of funds at their disposal. When they start buying, share prices would increase and when they sell, share prices decline

13. Level of foreign investment

In recent times, the level of foreign institutional investors (FII’s) have played a significant role in influencing share prices. If the level of foreign investment in the market increases (more buying of shares), then the share prices increase. If the level of foreign investment decreases of if FII’s sell their investments, then the markets fall.

14. Returns offered by other markets

If the Indian markets offer high returns, institutional investors (especially FII’s) would invest in Indian markets. Demand for shares would increase and prices rise. In case returns offered by markets in other countries are attractive, then institutional investors would sell their securities in order to invest in those markets. In such cases, shares would be sold in large quantities lowering prices.

15. Availability of credit

In case credit is available without much restriction, then investors would borrow to invest in the markets. Demand for shares would be more and therefore prices rise. In case credit is restricted, then the level of borrowing would be less and demand for shares would also be lower.

16. Effective regulation

If the stock market is run in a transparent manner with effective regulation then the investors would feel confident to invest. Therefore more buying would take place and share prices increase. But when regulation is ineffective and if scams occur (Harshad Mehta scam, MS Shoes scam, CRB scam, Ketan Parekh scam and the recent IPO scam) investors would lose confidence. They would panic and sell their shares. So prices would fall.