The 10 Factors That Affect and Predict Stock Prices

The 10 Factors That Affect and Predict Stock Prices

This is the most frequent question that most stock/options traders may have in their minds. Stocks price changes due to market forces, i.e. buying and selling of the available stocks in the market.  The following are the factors that affect or even predict the buying or selling of stock that ultimately affects stock prices of companies.

·         Market sentiment.  The price of the stock of a company is affected most of the time by the general market direction during a session.  In a bull market, the stock price of most companies will rise and in a bear market the stock price of most companies will fall.  One can gauge the market sentiment by looking at stock indexes or its future price movement.  The stock indexes are S&P 500, Dow Jones Industrial Index, Nasdaq (USA), ASX100, ASX (Australia), Nikkei 225 (Japan), Euronext 100, Euronext 150 (Europe Union), DAX, TECDAX (Germany), FTSE 100, FTSE All Shares, FTSE Techmark (United Kingdom.

·         The performance of the industry.  The performance of the sector or industry that the company is in also plays in part in determining the stock price of the company.  Most of the times, the stock price of the companies in the same industry will move in tandem with each other.  This is because market conditions will generally affects the companies in the same industry the same way.  Of course, there are exceptions to this.  Sometimes, the stock price of a company will benefit from a piece of bad news in its competitor if the companies are competing for the same target market.           

·         The earning results and earning guidance.  The main objective of a company is to make profit.  Therefore, investors and traders always assess a company based on its Earning Per Share (bottom line) and Revenue (top line) and its future earning potential.  In US, companies generally report the earnings results every quarter-yearly.  A company that achieves good earning results (EPS and Revenue) expects a boost in its share price and one that delivers poor earning result shall see a beating in its share price.  Sometimes, besides reporting the EPS and Revenue for the past quarter, a company may also issue guidance (expected value) for the EPS and Revenue in coming quarter or coming years.  This is also closely monitored by investors and is an important factor that will affect the company stock price.

·         Take-over or merger.  In general, a company being taken-over is anticipated to get a stock price boost and the company taking over another company shall experience a drop in its share price.  This is assuming that the company is being taken over at a premium, meaning it is being bought over at a higher price than its last traded stock price.  Depends on the agreed term, a company can be bought over by cash or stock (of the acquirer) or a combination of the two.  In some minority cases, the stock price of the acquirer may get a boost if it is perceived that the acquisition shall contribute to its earning or revenue in the near future.

·         New product introduction to markets or introduction of an existing product to new markets.  The introduction of new product to market is seen as a revenue enhancer for a company.  This also applies to an existing product that breaks into new markets.  Sometimes, the prospect of a new product introduction suffices to improve the stock price of a company, this is often observed in surges in stock prices of pharmaceuticals companies after the announcement of successful clinical trials, or FDA approvals for new drugs.

·         New major contracts or major Government Orders.  A company that is able to obtain new major contracts or major government order is expected to see a bull run in its stock price.  Those companies that fail in the contract bidding normally experience the fate of sell-off in its stocks.

·         Share buy-back.  The act of share buy-back by a company will reduce the number of share available in the open market.  Due to the law of supply and demand, a reduction in share available for trading in this case will cause a drop in supply, this will normally help increase the share price.  Also, the continuing buying back of share of a company will also acts as a support for the share price that helps to maintain or increase the share price.  The investors may also see the share buy-back by company as a confidence booster for them in the company itself.  Therefore, share buy-back is quite often used as a tool to deliver value to the investors.

·         Dividend.  After the announcement of a dividend.  The stock price may increase by an amount close to the dividend per share value.  However, the stock price may drop on the ex-dividend date by the dividend per share amount.  This is because anyone buying a stock on or after the ex-dividend date are not entitled to the corresponding dividend payment.

·         Stock splits.  Stock split in theory, should not have an impact to the stock price.  However, it is generally observed that the stock price increases (after taking into account the increase in the number of share) after a stock split.  Some attributed to the better affordability of the stock after stock split, some attributed this to the perception of cheap stock due to the lower stock price after the stock split.  Some however believes that stock split has no real impact on the stock price (effective stock price, taking into account the change in number of shares), as the stock price will increase regardless of stock split.

·         Insider trading.  Insiders include CEO, COO, CFO, Chairman, board directors etc, who has first hand information about the operations and the financial status of a company.  Therefore, the buying or selling of stocks by these insiders may herald some good or bad news about the company.  This is being watched closely by savvy stock investors/traders.  However, do be aware that due to compensation package that comes in the form of stock or stock options, the insiders may sell their stocks/stock options to cash-in their compensation benefits.  So in this case, it may not signal anything significant about the company.  A savvy investor should know how to observe and filter out this piece of information from your investment or trading decisions.

·         Investment Gurus / Hedge Funds trading.  The investment decision of highly revered investment gurus like Warren Buffett, George Soros, Carl Icahn are closely monitored by investors and therefore will move the market.  Hedge fund stock buying and selling are another source of information regarding the flow of “smart money”.

·         Analyst upgrade / downgrades.  Analyst upgrade and downgrade to a stock may have positive or negative impact to the stock prices.  However, one needs to be wary of the fact that quite often analysts’ upgrades or downgrades happen “after” some important news about a company.  For example following a extremely disappointing earning result, many analysts will likely to downgrade the company stock.  So, it is very likely that by then the stock price of that company has already priced-in the poor earning result, and analyst downgrade may not have further impact to the stock price.

·         Addition/Removal to/from Stock Index.  Stock Index Fund are those funds that invest in those company stocks that are included in a particular stock index (e.g. S&P 500, Nasdaq-100, Dow Jones U.S. Large Cap etc.) .  Therefore, an inclusion of a company stock to a stock index will generate buying interest in the stock for these stock index fund managers.   The stock index fund managers will dispose of the stock that has been removed from the stock index.

·         Others.  These include news about new technology, patent approval, war, natural disaster, product recalls and lawsuits that shall have positive and negative impact to the relevant company stocks.  The health or mishap of a key leader in a company may also affect the stock price of the company.  Take a look at the recent news about Apple Computer.

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