If you know what the stock market will price tomorrow, you can be rich in no time. If there were an analysis technique that can get you 100% confidence if the stock goes up or down, everyone would be using it, and people will make no losses in the stock market. Unfortunately, there is not. However, you can estimate the price of the stock that can lower uncertainty and minimise your risks.
As a whole, Stocks follow earnings, if a company does well, the stock will go up, and the price will go down if the company bring fewer earnings. Shareholders determine the price of the stock. Investors stick to stock if they think the price will go up based on fundamental and technical analysis. However, if a company suffer a setback, the investors might be tempted to pull their money out, which drive the stock price down.
The volatility of the market is the result of the law of supply and demand. If a company does well and increase earnings, that makes it hot among investors, there will be more demand between buyers which will drive the stock up because people are willing to pay more. Similarly, if the stock suffers a setback, it can trigger a panic sell between buyers, increasing the supply of the stock but lowering the demands, which drives the stock price down.
Types of investors that influence the stock price?
Stocks are not lottery tickets, but it is impossible to predict. However, you can estimate the price, which can steer the odds in your favour. There are different ways to value stocks depending on the type of investors and how long the assets are held. In general, there are two types:
- Short-Term Investors: They rely the most on technical analysis, which is based on the stock price using tools and averages to predict the stock price. You can learn more about day trading here.
- Long-Term Investors: They rely on fundamental analysis, which is related to the company historical performance to predict future earnings. Successful investors use margin of error to reduce the risks of losing money in the stock market. You can learn more about valuing stock for the long term here.
In addition to the above, there are other types of investors, such as passive investors who invest in ETFs, which allows them to buy a slice in a particular market, Pre-investors who invest in a company before it goes public, and finally, the investors who bet against the company by shorting stocks.
Therefore, you can use different techniques to estimate the stock price in the future, making it possible to profit in the stock market. However, the various methods used by different investors make the stock volatile, where everyone has his own opinion of the stock’s future. In addition, there is also a lot of speculation between investors, which can make the stock perform contrary to the stock earnings, which raises the risks of investing in the stock market.
10 things that can affect the stock price
1- Interest Rate
Interest rates determine the flow of money in the market and how investors leverage their money to buy assets. In general, when interest rates are low, more money flows into the stock market because people can leverage their money at low-interest rates, making it cheap to buy money; on the other hand, when interest rates are high, money flow out of the stock market because it becomes more expensive to borrow money.
Governments control the interest rates as a way to control the inflation rates. When inflation rates get above the normal levels, the government increases inflation rates to slow down the economy, affecting the stock market. Governments try to keep the interest rates at a desirable level to keep the economy going since high interest rates can put the economy into recession.
2- Company performance
The performance of the company has the highest effect on the stock price. Company performance is the company’s ability to increase earnings. Suppose a company performance is down from last year, which negatively affects the stock price. At the same time, an increase in earnings attracts more consumers, increasing the stock price.
There is no limit to how much the stock price can go up or down. In the short term, the stock might not perform the same as the company earnings, and sometimes it takes time for a company price to catch up with the company earnings. However, in the long term, the stock seems always to give the stock’s actual value.
3- Management
The managements are the people who make all the company decisions on behalf of the shareholders. The CEO and the board of directors control the future of the stock, which means they have the power to increase the company earnings.
Many factors determine the CEO’s ability to increase earnings, such as being owner-oriented goal-driven to improve the company earnings. The most essential is that the owner needs to act for the benefit of the shareholders, such as paying dividends or buying back shares to drive demand to the stock, increasing the stock price. For more details on evaluating the CEO and the management, I wrote an article you can check here.
4- Insider trading
Insider trading is when people within the company start selling or buying shares at a massive rate, influencing shareholders to sell and buy more stocks.
Usually, insider trading does not relate to the company’s performance and is sometimes due to insiders needing to cash out on some stocks for personal reasons. However, when there is heavy buying of stocks between insiders, it indicates that the company is performing well, and the stock price will likely go up. Insider trading can also trigger panic sell among investors, where heavy insider selling drives the stock price down quickly. You can learn more about insider trading here.
5- Dividends
Dividends are what companies pay shareholders for holding their stock. Many factors affect the stock price, but when a company pays high dividends, it attracts more investors who increase demand, raising the stock price.
The dividend is paid from the company free cash flow after it has paid for all operating expenses. However, some companies borrow money to pay dividends to keep investors from selling their shares, preventing the stock price from going down. Therefore, the dividend has a significant influence on keeping shareholders in the company. When consistent dividend-paying companies reduce their dividends or stop paying dividends, it can affect the stock price negatively.
6- Fund managers
Fund managers of big funds such as mutual funds or hedge funds have massive capital in the stock market. When they invest in a company, they can drive the stock price up because they move vast amounts of money to it (in Billions). When they sell out of a company, they can drive the stock price down very quickly.
Fund managers have the most significant influence on the stock price due to the huge capital they possess. Small investors do not influence the stock price in the same magnitude for huge fund companies, especially companies with huge market caps.
7- Economy recessions
Recessions affect the stock price because they scare people and increases speculations in the stock market. When recessions happen, a tremendous amount of money is taken away from the stock market, forcing the stock price down.
Depending on the industry and the type of business, companies perform differently during recessions. Some companies recessions affect the company performance by lowering their sales or drive them to take on loans to keep the business operational. On the other hand, some companies thrive during recessions and increase their earnings that attract more people to buy their shares. Investors like to invest in a company with a strong moat that can service in all types of economic recessions.
8- Competition
Competition between companies determines if the company has a moat to defend itself from the competitive product in the market. Companies that do not have any competitive advantage can be crushed by their competitors, affecting the profit and decreasing the stock price.
In every industry, there are top-performing companies because they have a moat that enjoys a competitive advantage over its competitors. Companies usually do not keep their moat forever because competition can always produce a superior product.
Companies with weak moat can not keep well with competition, especially during recession times. For example, in Industries such as commodities, companies enjoy little to no moat because other competitors can easily replicate it.
9- Media coverage
Media has a significant effect on certain companies stock prices. When a company does something exciting and attracts many investors, it can drastically increase the stock price. Also, when a company loses is reported heavily on media, it can drive the stock price down quickly.
According to Peter Lynch in his book One up on wall street, the type of business has a huge effect on media coverage. Media and investors cover techy companies with exciting names and products on a vast scale that makes them volatile. However, companies that do something depressing and not exciting are not covered by the media and investors on a large scale, making them suitable investments.
10- Change in company business model
Change in the company business model, such as changing the way the company brings income, acquiring or selling a product line, or merging with a company, can affect the company’s earnings. When the company business model changes, it can change how it deals with suppliers or sells its product, impacting the stock price. Therefore, the company must be re-evaluated when changes to the business model happen.
When to Sell stock for a profit
Selling stocks depends on the type of investor. If the investor is a short term day trader, the stock is sold depending on the market volatility when the stock price is higher than the original price purchased by the investor. On the other hand, the long term investor sells the stock when if:
- When stock becomes overprice
- When the company fundamentals have changed
- Selling for a better investment opportunity
For more information, I wrote an article about When Should You Sell a Stock for Maximum ROI?
The Bottom Line
Investors can predict stocks based on historical data, fundamental and technical analysis. But because there are different ways to value stocks, it can make the stock price volatility, and that is why sometimes the stock does not follow the earnings.
Therefore, the stock price does do not tell you anything. Even if you use technical, fundamental, and historical data to analyse stocks, it can not provide 100% certainty in the future stock value. Day trading, in general, makes for more speculative investing because it is difficult to estimate where the stock will be going. However, in the long term, there is more certainty in predicting the stock price.
In conclusion, stock in the long term can give you the actual value of the stock. If you want to reduce the chances of losing money in the stock market, I wrote an article you can check here that can help you.
