2. Understanding what moves stock prices
2. Understanding what
moves stock prices
Stock trading is all about taking advantage of stock price movements and so one of the key elements of your market analysis will be understanding what moves the prices of different shares.
After a company sets a price at which it will list on a stock exchange any subsequent price fluctuations are the result of any changes in the supply and demand for the stock. The supply of a company’s shares is relatively easy to understand; it’s always limited and known. Even when a company decides to buy back or issue more shares, the total number of shares in circulation is always known.
On the other hand, demand works a bit differently. If more people want to buy a company’s shares compared to those who want to sell, demand increases and the stock price increases as well. Conversely, when sellers on the market exceed buyers, demand decreases and the stock price falls. While supply is always known, demand fluctuates over time. Several factors contribute to this fluctuation including:
2a. Macroeconomic data: The state of the economy and the political landscape a company operates in will affect its growth, and ultimately, its share price. Data such as GDP, retail sales, and government policies can affect the number of people willing to buy or sell a company’s stock, causing the price to rise or fall.
2b. Company earnings reports: A company’s share price will depend, to a large extent, on the company’s performance and many traders will use figures such as earnings per share (EPS), revenue, and profit when they do their fundamental analysis. Poor performance will likely result in less demand for a stock.
2c. Market sentiment: The view that market participants and the public have on a particular stock can cause demand to fluctuate. Unlike fundamental or technical analysis, market sentiment is subjective and often biased, nonetheless, it has the power to increase or decrease demand. For instance, a stock’s growth prospects can be good according to fundamental analysis but a single piece of negative news can cause demand to decrease and affect prices significantly, especially in the short-term.
2d. The economic strength of peers: In addition to performance, a company’s stock price tends to move in line with the demand and prices of other stocks in the same sector or industry.
2e. Interest rates: When interest rates are lower, people have more money to spend and this tends to increase demand for stocks. When interest rates are higher, people have less to spend and so demand tends to fall. So, for instance, if it seems likely that a central bank is about to increase interest rates, demand for stocks may decrease.
3. Creating a good trading plan
A good trading plan is at the core of many traders’ success. A good trading plan outlines aims, expectations, trading style, risk appetite, as well as money and risk management rules that include when to enter and exit trades. A plan will not only give your trading some structure, but it will also help you with educated and sound-decision making that increases your chances of succeeding in the market.
