What makes share prices go up and down?

Stock markets rise and fall all the time – but what causes such movements and how can they affect your overall investment portfolio? Here we take a look some of the reasons why share prices fluctuate.

Financial results

Listed companies report their results on a quarterly basis to the stock market. These reports will detail key information such as the revenue and profit generated over the period in question. Investors are also able to compare the most recent figures with the previous quarter, as well as the corresponding period last year, to see whether the trend is positive or negative. Senior executives will also explain the background to the results in this written statement – as well as on calls to stock market analysts. This will help put everything in context.

Company updates

While there are set times of the year when companies have to report figures to the stock market, they will also make other announcements. For example, there will be trading updates highlighting how they’re doing, press releases associated with new launches, and statements made when executives are hired or departing. Basically, any news that could move the share price – whether it’s a contract win or a takeover approach from a rival – must be reported.

Analyst recommendations

Quoted companies, particularly the larger businesses, will often have an army of stock market analysts poring over their figures. Positive – or negative – ratings from these analysts can affect the stock price, as can the commentary they provide in response to recent financial results. They will usually state whether they see company shares as a buy, hold, or sell, as well as giving their estimate of the fair value for the share price. This can be compared to its current trading level.

Economic factors

The general economic backdrop can play a part in a company’s valuation. For example, retailers may experience less demand for their shares during a cost-of-living crisis. This is due to investors expecting such businesses to struggle over the coming months with people having less disposable income to spend. Conversely, when people are feeling wealthier, they may be more inclined to spend and share prices could rise as a result. That’s why the stock market often responds to key financial announcements.

Good news/bad news

It’s worth pointing out at this point that a trend or development can be very good news for one company but completely disastrous for another. For example, a period of rising interest rates may be bad news for businesses reliant on consumers as they may have less money to spend. However, interest rate hikes are good news for banks who will generally charge more on the money that they lend. That’s why it’s important to consider how different sectors may be affected.

Industry trends

Broader industry trends can also influence share prices. For example, reports detailing an expected increase in demand for certain products can be a positive for companies in those areas. This is often seen within technology. An increase in people working remotely could be good news for cloud computing firms as investors may predict a rise in demand for their products and services. Conversely, some trends could have a detrimental effect on valuations. A prime example is an online shopping boom with the downside being how high street retailers will be affected.

Trading in shares

News that executives in a company are buying – or selling shares – can also affect the price. If they’re snapping up more stock it can be seen as a sign of confidence in future prospects. This could increase demand for shares and cause prices to rise. Alternatively, if executives are offloading a significant percentage that may be seen as a red flag. Similarly, major institutions buying or selling stock can also have an impact. In some cases, rivals may be quietly building up a holding in order to prompt a potential takeover approach.

Media speculation

Newspapers and websites are full of stories about companies that can affect their share prices and may be enough to prompt executives into responding. Potential takeover talks, the headhunting of senior figures by rivals, the winning – or losing – of contracts, and new product launches can all make the headlines. Whether or not it’s believed will usually depend on the publisher of the article, how well-sourced the story is, and the potential impact of the news item on the company’s prospects.

Inflated areas

Another factor that moves markets – and one investors need to be very wary about – is when sectors are booming without any clear reason for such enthusiasm. A great example happened more than 20 years ago. This period saw excitement about technology stocks reaching fever pitch and lofty valuations attached to such businesses. However, the subsequent bursting of the so called dot.com bubble wiped out many investors’ portfolios virtually overnight. You always need to consider the potential downside of investments.