Updated: 20th February 2020
Share prices are prone to fluctuation, and it is this uncertainty which makes trading an unpredictable, and therefore potentially lucrative, activity. They are at the mercy of both internal and external forces which can see prices inflate or plummet downwards overnight.
Supply and demand has a big part to play. When shares of a company are in hot demand, expect to part with more money to purchase them; conversely if demand wanes, the share price will follow suit. However, it is what creates this demand, or lack thereof, which is particularly interesting. A whole host of factors contribute to how in demand a given company’s shares are.
Good news tends to attract others wanting to share in the highs. When something is doing good more people want in, when something is on the decline, shares are often offloaded to lessen the financial impact of a market crash. But what exactly is it that causes a company’s share price to rise or fall? We take a look.
Looking to the future
Share prices don’t just reflect current conditions; they are also heavily impacted by the likely future prospects of a company. If the company is doing well and all signs point to this trend continuing, then share prices will rise accordingly.
However, it may not always be this simple; healthy profits do not always translate into increased share prices particularly in uncertain political or economic periods. In some instances a company could be doing well and posting healthy profits, but if there is a fear that trying times may be around the corner, then investors will be more wary about buying a stake.
Companies are legally required to make regulatory announcements notifying the public (including potential or existing investors) of any upcoming event or emerging issue that could affect its share price. This encompasses a range of possible events which could include a proposed takeover, entry into a new market, or a new product launch.
This is a prime example of how a company’s share price is dictated not only by its own performance, but also the wider environment as a whole. Any impending legislative or sector-wide changes are liable to send share prices rocketing, or come crashing down regardless of its current performance in the market.
Performance is key
However, in the majority of cases, performance, and more importantly how this is reflected in its balance sheet, is a good indicator of the future direction of its share price. A company which is posting increased profits and growing its operations is much more desirable than one issuing profit warnings. Not only does this keep share price up and protect their initial investment, but a healthy profit means there is likely to be dividend pay-outs to shareholders too. This then has the effect of attracting other investors who also want a piece of the action, sending prices soaring further.
Conversely, a business suffering a drop in sales, decreased profits, or experiencing problems with delinquent payments or an otherwise damaged credit rating becomes a less attractive prospect to potential investors.