Success in capital markets depends largely on the movement in the prices of the stocks an investor takes position in. These price movements are governed by a number of factors that could be fundamental or intrinsic to the stock itself, based on its environment, as well as a number of technical factors.
Today, we review the technical factors that govern price changes or cause price volatility.
These factors represent external conditions that alter the supply of and demand for a company’s stock and a clear understanding of what they are will certainly help you make better decisions as an investor. They include:
1. Market Trends
A trend is simply referred to as the upward or downward movement of a stock’s price over a period of time. Various trends govern the stock market; when there is an upward movement it is known as an uptrend and when it is downward over a period of time, it is said to be a downtrend.
They also cut across short-term, intermediate-term and long-term periods. These trends are usually created by a myriad of forces like Govt policies tends toward economy activities, monetary policy, foreign portfolio investment, speculation/expectation and even forces of supply and demand.
An example of a trend is where a stock keeps rising as its growth causes it to grow some more. This is the momentum effect. There are also circular trends that rotate after certain periods of time.
In order for you to gain from specific trends, you must move with it and not against it. However, because many trends govern the market, trying to predict the future with them will be a cumbersome activity.
The basic definition of inflation is that it is a sustained increase in the general price level of goods and services in an economy over a given period of time.
The most apparent influence of the inflation rate is what we all experience as citizens of a country and it is simply that when prices are higher, we have less money to purchase items. In other words, inflation indicates a decrease in the purchasing power of a nation’s currency.
In the stock market, low inflation is known to drive high multiples and high inflation also drive low multiples. For clarity, multiples are used by investment bankers and financial analysts to determine how much investors are willing to pay per shilling on earnings. Also, inflation makes you pay more for less as prices increase without a corresponding increase in value.
Dividend stocks are especially affected by inflation as income stock prices generally decline. When inflation is on the rise, prices are generally higher, you purchase less for your money’s worth, and profits also decline.
While you are not in control of inflation as an investor, it will do you good justice to adjust for inflation when projecting your expected gains. It will help you control your expectations.
3. Insider Information
The stock market moves based on information. How this information affects prices depends on a concept known as efficient market hypothesis and it basically refers to how asset prices reflect all available information.
Where this information is not public and known to only a few, those involved in it are inherently motivated by something else as opposed the intrinsic value of the stock. There are cases of executives making moves in the market like shorting specific stocks for what seems like no reason at all.
As a result of their effect on supply and demand, they affect the price and ultimately volatility of the stock market.
4. Demography Of The Market/ Market Players
Population is spread across a wide demography. As such, even the stock market is made up of different people who contribute to the sentiment of the market in a diverse range of ways.
And because demography is never constant, there are investment opportunities and risks associated with it. On one hand, you have the young and middle aged investors who actively invest for growth in the stock market and on the other hand, you have the older investors who now want to pull out their funds from the stock market in order to meet retirement needs.
Where the market is primarily made up of middle-aged investors, then there will be more demand for stock investments and this will increase the multiples.
The prices in the stock market are determined by these factors and more. These forces which are often unpredictable explain why market volatility is the stock market is a norm.
Knowledge of them will help you understand why certain things happen in the market. With this information, you can employ necessary strategies to protect or enhance your investment portfolio.
Fluctuations in the economy feature what are commonly referred to as booms and depressions. Under favorable conditions share prices are at their peak and their lowest point is experienced during depressions. Share prices gradually rise during recovery and fall during recessions
6. Investor sentiment
Investor sentiment or confidence can cause the market to go up or down, which can cause stock prices to rise or fall. The general direction that the stock market takes can affect the value of a stock:
- bull market – a strong stock market where stock prices are rising and investor confidence is growing. It’s often tied to economic recovery or an economic boom, as well as investor optimism.
- bear market – a weak market where stock prices are falling and investor confidence is fading. It often happens when an economy is in recession and unemployment is high, with rising prices.