What Influences Stock Price Movement?

Stock prices are influenced by supply and demand, and other 'subtle' factors. Stock prices change throughout the day and "price" is basically a record of the last trade that closed. So how does a trade happen? Remember that there is a buyer (bidder) queue and a seller (offer) queue, both sorted by price and arranged on a first come, first served basis. When one of the bidders offers a bid amount high enough to match a seller's lowest price, or a seller lowers the price to match a bidders offer, a trade happens.

Regardless of the number of shares traded (20 shares or 20 million), the resulting price is now the price of the stock. Price moves when buyers bid up one another and push up the price, and when sellers compete with each other to sell and push down the price. If there are more buyers than sellers, sellers are at liberty to raise prices. If there are more sellers than buyers, however, sellers lower their offer and thus the stock price.

On a larger scale, prices are also influenced by fundamentals. Let's take company ABC, with revenue and profits on an upward curve without hint of plateauing. As investors clamour to bid up the company, stock prices will rise. Company DEF, on the other hand, shows flat profit trends that hint at a continuous slow decline. It's reasonable to expect investors to jump ship and let the stock prices fall.

Not so obvious changes in the business can also happen and affect price movement, such as poor acquisitions, debt and bad mergers, and at the other end of the spectrum, sector booms. For example, if the entire InfoTech sector spontaneously combusted, players under the umbrella will also be negatively affected, regardless of their participation. Sector changes are usually temporary and long-term investors will ride out the trend. Drastic changes (i.e. regulation), however, should make you review your position.

Price is also influenced by general market conditions. A strong market trend (upward or downward) can carry large cap stocks along with it to an extent, but smaller companies may trail. If the market increases your stock’s price to the heavens, it may be time to wait it out and let the price settle down before re-investing.

Why buyers buy and sellers sell is another matter. Emotions play a part in supply and demand, as well as social and economic conditions. Reasons need not be rational at all, like selling shares to pay for a kitchen addition. Informed investors make it their business to identify these changes and act before they affect pricing.