Knowing how market price raises and falls is analogous to understanding the costs of other products in the market. It also follows the law of demand and supply. Cost of stocks rise and fall due to the following reasons:
1. Company profit projections and image
A company’s growth and profit forecasts describe how capable a company is in delivering its guarantees to its investors. These numerical projections are punctiliously prepared by a company based totally on their past profits and projected additional profits due to new products and services, operations and sub-structure improvement.
Aside from profit forecasts, company image can also make an impact on a company’s profitability. Rumors of change in management, take-over, mergers, and even personal issues about the company’s top executives can affect the company’s image.
For example, a rumor of an amalgamation between 2 huge corporations projects more stability and greater profit projections for both companies. As more investors would want to buy stocks from these merging companies, the demand for their stocks will rise. Based on the law of demand and supply: the bigger the demand for stocks, the higher will their costs be.
A bankruptcy rumor about a company can send its investors to sell all their stocks. If there are more sellers than buyers of stocks then the supply (of stocks) is greater than the demand for stocks thus, stock price will fall.
2. Political Economy
General reports about the local and global politics have an immediate effect on the economy and hence to stock market prices. Politics and economics are interrelated. Positive stories like lower rates of unemployment, increased productivity, peace and order, and robust confidence in the government have positive effect on the economy. Such reports encourage more local and world investors to open firms in a certain location or country. This in turn would generate more roles, and as an effect, would inspire more trading in the market at higher stock prices in general thanks to the increase in demand for stocks of different companies.
On the other hand, negative news such as political instability and turmoil, security problems such as terrorism and insurgency, frequent strikes, and inflation has negative impact on the stock market prices. Investors are driven away by these things and close-up. As an effect, more stockholders would sell out. This creates more sellers than buyers thus stock market prices fall.
3. Interest rates
Higher interest rates are associated with a slump in economic growth. This creates a sluggish environment where investors become apprehensive in buying stocks. Either they keep the status quo or sell out their stocks. When the demand for stocks is not high, prices will go down.
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