Why do Stock Prices Move Up and Down?

Why do Stock Prices Move Up and Down?

Why do Stock Prices Move Up and Down?

The market price of a particular share is dependent on the demand/supply for that particular scrip. If the players in the market feel that a particular company has a track record of good performance or has the potential to do well in the future, the demand for the shares of the company increases and players are willing to pay higher prices to buy the share.

What are equity assets?

Corporates can raise money in two ways; by either borrowing (debt instruments) or issuing stocks (equity instruments) that represent ownership and a share of residual profits. The equity instruments are in turn typically of two types – equity shares and preference shares.

Equity Shares: This represents an ownership position and provides voting rights.

Preference Shares: It is a “hybrid” instrument since it has features of both common stock and bonds. Preferred-stock holders get paid dividends which are stated in either percentage-of-par (the value at which the stock is issued) or rupee terms. If the preferred stock had an Rs.100/- par value, then a Rs.6/- preferred stock would mean that a Rs. 6/- per share per annum in dividends will be paid out. This fixed dividend gives a bond-like characteristic to the preferred stock.

Why do stock prices move up and down?

The market price of a particular share is dependent on the demand/supply for that particular scrip. If the players in the market feel that a particular company has a track record of good performance or has the potential to do well in the future, the demand for the shares of the company increases and players are willing to pay higher prices to buy the share. And since the number of shares issued by the company is constant at a given point in time, any increase in demand would only increase the market price.

Fluctuations in a stock’s price occur partly because companies make or lose money. But that is not the only reason. There are many other factors not directly related to the company or its sector. Interest rates, for instance. When interest rates on deposits or bonds are high, stock prices generally go down. In such a situation, investors can make a decent amount of money by keeping their money in banks or in bonds.

Money supply may also affect stock prices. If there is more money floating around, some of it may flow into stocks, pushing up their prices. Other factors that cause price fluctuations are the time of year and public sentiments. Some stocks are seasonal, i.e. cyclical stocks; they do well only during certain parts of the year and worse during other parts. Publicity also affects stock prices. If a newspaper story reports that Xee Television has bought a stake in Moon Television, odds are that the price of Xee’s stock will rise if the market thinks it ’s a good decision. Otherwise it will fall. The price of Moon Television stocks may also go up because investors may feel that it is now in better hands. Thus, many factors affect the price of a stock.

What are equity markets?

These are markets for financial assets that have long or indefinite maturity i.e., stocks. Typically such markets have two segments – primary and secondary markets. New issues are made in the primary market and outstanding (existing) issues are traded in the secondary market (i.e., the various stock exchanges).

There are three ways a company can raise capital in the primary market –

  • Public Issue : Sale of fresh securities to the public
  • Rights Issue : This is a method of raising capital from existing shareholders by offering additional securities to them
  • Private Placement : Issuers make direct sales to investor groups i.e., there is no public issue.

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