Although the price of a share can be influenced by many factors, there are several main factors that should be taken into consideration during the analysis. There are five most important factors that affect the price of any stock traded on the stock exchange. The market is working for the future, so the price of the stock is a reflection of the company’s future value. Understanding these factors will help you to properly respond to the price movement.
Supply and demand
The main factor in the formation of the share price is the availability of supply and demand. If demand exceeds supply, the stock will grow in price. Conversely, if the supply exceeds demand, the stock will fall.
The market value of a share is represented by the bid price and the ask price. Buyers form the demand represented by the bid price on the left side of the exchange cup. Sellers determine the offer, expressed by the price of asc at the right side of the exchange cup.Thus, the highest bid is the maximum price that buyers are willing to pay, and its size shows how many shares they are willing to buy. Ask, also called the offer price (“offer”) is the lowest price at which sellers are willing to sell the stock, and its size shows how many shares they are willing to buy. It is clear that the bid and ask prices will fluctuate depending on demand and supply at the moment. This is how the market price of any financial instrument is formed.
Number of shares in circulation
As stated above, the market is formed by demand and supply. The number of shares in circulation (outstanding shares) is the total number of shares issued by the company, and the number of shares in free circulation (float) shows how many stocks are actually available for trading. Shares in free circulation can freely trade on the open market at any time. The real number of shares available for trading is a real mystery, since the number of buyers and sellers at any given time may be limited.When news is released or data is changed for a fundamental analysis, the number of shares offered for free buying / selling may increase or decrease, as each private investor or fund applies a set of own criteria that act as a trading signal, to enter and exit positions. In situations where the volume increases dramatically (for example, when a report is issued or the FDA decision), the number of free float shares may also sharply increase or decrease.
However, traders can roughly determine the range of values available for trading stocks. If the shares are not in free float, the offer is low, and less demand is required to push the price up. Conversely, if a company has a lot of shares in free float, the offer is great. Consequently, considerable efforts of buyers will be required to significantly affect the price.
Shares with a low float are more volatile and have broad spreads (the difference between bid and ask prices). Expensive shares with a large number of securities in free float, but low volumes of trade, can also move very quickly, which is associated with a large share of institutional shareholders, which leads to a significant decrease in the volume of free shares.
Fundamental data
Fundamental share data refers to the financial performance of the company and reflects the results of doing business. They are designed to answer the age-old question of value: what is the true value of the company now and in the future? Although the true value of a company does not always correspond to its public estimate (the price of a share), it can still affect supply and demand. For example, a company that seems to be undervalued can enjoy increased demand. Therefore, the volume of purchases will be greater, which can push the price up.
There are many different fundamental catalysts that can influence the price. To popular financial indicators, which are used for rapid analysis and evaluation of the company, you can include the price / earnings ratio (P / E), the price / sales ratio (P / S), free cash flow, enterprise value and book value.
News can also give information about material changes in the company’s activities. Profit reports are issued at the end of each quarter. Quarterly financial indicators are submitted to the SEC in the form of a 10-K form. The output of the report is often accompanied by a conference call, during which shareholders have the opportunity to ask questions and listen to the reports of the company’s management. Forecasting the company for future profits, analysts and investors pay close attention, since it has the most real impact on the price of shares.
Company perception of market participants
In the stock market, perception is the real thing. It is the perception of the company by market participants that forces speculators to make a decision about buying or selling. In summary, the perception of the action creates a mood. If the mood is negative, the stock can trade below its real value, and if it is positive – with a significant margin. The mood of traders is influenced by news related to the leading companies, news of the sector or industry.
Bearish mood For example, when the perception of pharmaceutical stocks worsened due to a sharp rise in prices for certain drugs, sentiment became bearish. This worsened the behavior of the shares. The media prompted Congress to conduct an in-depth investigation into the prevailing practice of pricing medicines, which further weakened the pharmaceutical companies.
Bull mood On the other hand, certain stocks that are commonly referred to as blue chips can maintain abnormally high P / E ratios (compared to the industry average) precisely because of the extremely positive sentiments of market participants. This bullish mood serves as fuel, which helps the stock to reach a new High.
Industry standards
The stock market consists of several sectors, such as health care, information technology, related products and others. In turn, the sectors are divided into industries. As mentioned above, perception plays an important role in the formation of the share price. Money, as a rule, gravitates to “hot” sectors, and especially – to “hot” industries inside such sectors. To compare competing companies, standard financial indicators specific to the industry are used.
Average P / E ratio: Price / earnings is a widespread indicator that is used by mutual funds and small investors. Find the average P / E ratio by looking at the characteristics of the most widely traded ETF in a given sector or industry. For example, if the average P / E of the sector is 20.49, this value can be used as a criterion for assessing companies within the industry.
Trends in the industry The behavior of shares, which are the leaders of their industry, may indicate a general trend and mood in this industry. Fundamental trends in the industries are formed by publications in the media, legislative acts, events, catalysts, etc. Some industries are perceived as growing, and others – as dying.
The overall health of the industry / sector can affect the success of the particular stock involved. For example, cyber-security is a growing industry that gets into the news after every major hacker attack or data hacking. Some shares from this industry can be strong simply because they belong to a strong sector.
Life Cycle Beginning companies at the beginning of their life cycle can show rapid growth, their sales volumes can increase by 25% and pain for one quarter. At the initial stage, the indicator of gross revenue growth is used everywhere, and not profit. But then, as the company grows up, the dynamics of profit comes to the fore. When the company achieves stable growth in revenues and profits, it can become a leader in its industry. The most successful and stable companies over time become reference points for the sector and the associated index. Traditionally, it is these companies that are popular with traders in stocks.
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