In its simplest terms, share prices change in reaction to shifts in supply and demand. When more people want to buy a share than sell it, the price of that share may rise because it’s more sought-after. Conversely, if more people wish to sell the share than buy it the price drops in line with the demand.
So what are the key factors that cause share prices to move?
Financial health of the company
The financial health of a company is probably the most key thing that influences share price movement. As the market learns of a company’s financials, be it earnings reports demonstrating profit or loss, or trading updates confirming or changing targets, a company’s shares will be revalued and repriced by the market.
Key company news
Any significant news announced to the market, either officially via a system like RNS or unofficially via press leaks, has the potential to impact share price. This could be the departure or new hiring of management and board members, or could be something as simple as a new product launch.
So far these are all things that a company controls, but there are also factors outside of a company’s control that can move their share price.
Economic changes such as inflation rates, interest rate changes, and the overall economic outlook will also contribute to share price movement. For example, if interest rates and inflation both rise, then the general economic outlook can be poor, which in turn can cause market demand to decrease. This is particularly pronounced in consumer facing companies and frequently leads to negative pressure on a company’s share prices until the economic outlook improves.
Industry trends, competitor activity, market sentiment and unexpected events, national or international, such as the Covid-19 pandemic, can all impact share prices as shareholders either look for safety or to increase their investment in response to significant news.
The effect of liquidity
The liquidity of a stock refers to how quickly shares of that stock can be bought, or sold, without considerable impact on the share price. For small companies this is often out of their control, as very few shares are available to be traded on the market, but larger companies can also suffer from poor liquidity if they have chosen to float only a small portion of their total shares.
Stocks with low liquidity are usually harder to buy and to sell. This means that when an investor makes a choice to invest they either have to do it in very small tranches, or pay over the odds for a larger amount. Likewise, an investor may find themselves unable to sell when they wish to – either forcing them to sell at a lower than desired share price, or to hold onto shares they don’t want.
All of this means that buying or selling an illiquid stock can cause temporary irrational price moves in both directions, moves that don’t necessarily reflect the underlying health of the company.
The effect of sentiment on share prices
Sentiment refers to the overall feeling of investors towards a specific investment or asset. Broadly speaking, it reflects the mood of the market and can sometimes differ from a company’s positive fundamentals. Whilst market sentiment is recognised as a subjective indicator, it can still be used to help inform technical analysis to predict changes in share prices.
Understanding market sentiment is important for investors, who will often listen to the mood in the market, as well as industry news, updates on the economy, and published company figures, when making decisions.
Sentiment can be significantly affected by a company’s management. This is particularly pronounced when it comes to how much investors trust the board or management team. The biggest contract signing can be greeted with scepticism if the management team has a history of over-promising and under-delivering.
Not forgetting ESG
ESG refers to ‘environment, social and governance’, and interest in this type of non-financial analysis has grown amongst socially-motivated investors over recent years.
Investors using ESG analysis use this set of standards to measure a businesses’ impact on society. Businesses can choose to consider their ESG impact through their chosen behaviours such as sustainability commitments, and decisions on employee welfare.
Share prices are ultimately dictated by the supply and demand of the market. Liquidity, market sentiment, and global economic conditions can all influence share price and mean that the financial health of a company isn’t always reflected by a share price.