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Top Factors That Affect Share Prices in the Stock Market

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Geetanjali Lachke

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Share values in the stock market constantly move, reflecting the value placed by investors on an individual company. Understanding the factors affecting share prices can help you develop deeper knowledge of the stock market and make better investment decisions along the way. 

In time, you can become aware of how certain factors impact prices across the securities market and not just individual shares. In addition, there may be factors that are specific to a company or a particular industry or others that are consequences of broader investor sentiments. 

With more information on hand, you can learn to time the market and thus buy and sell shares more efficiently. 

Understanding Share Prices and Their Movement

A share price is the amount that you, as an investor, are prepared to pay for a stock of a firm at a given moment. It is solely based on the demand and supply of the share in the market. When there are more sellers than buyers, the price drops, and when there are more buyers than sellers, the price rises. 

Yet, most factors that affect demand and supply have numerous layers and are multifaceted. These include:

  • Profitability

  • Growth potential

  • Industry dynamics

  • Current state of the Indian economy

  • Investor psychology

  • World events

Company-Specific Factors Affecting Share Prices

Several factors, such as earnings, a shift in management, or the performance of the company, may impact the final price of a company's stock. It is possible to make better decisions based on the following factors.  

Financial Performance

The most evident driver of a share's value is the company’s financial health, indicated by revenue growth, margin, earnings per share (EPS), and cash flow. Strong and stable profits signal a sustained or expanding enterprise. It is appealing to buyers and eventually increases the price. 

On the other hand, falling revenues or net losses could decrease share values in the market. Quarter and annual earnings releases show whether a company achieves, surpasses, or underperforms the market consensus. 

Management and Corporate Governance

Stable and solid leadership in the long term tends to suggest that the company is generating profit. It encourages you, as investors, to purchase shares. 

On the other hand, if there is too much leadership change, it indicates that the company may not be poised for growth. In general, uninterrupted and effective governance may reflect on confidence and share price movement.   

Dividend Announcements

Companies distributing regular dividends tend to attract investors who are more focused on income generation. A higher dividend declared by a firm can lead to a rise in share price, reflecting optimism about the company’s profitability and cash flows. 

Business Expansion and New Products

Factors such as a new product launch, expansion into a new market, or an acquisition made by a firm can positively impact share prices. This directly signals future growth opportunities for the firm. However, seasoned investors may also weigh the risks and costs associated with such initiatives.  

Corporate Actions

Corporate actions include stock splits, bonus shares, mergers, acquisitions, and rights issues. They influence share price and affect the number of shares outstanding, in which company value is interpreted.  

Macroeconomic Factors Impacting Share Prices

Share price is dependent not only on the performance of the company but also on factors outside of its control. Macroeconomic factors such as the global economy, currency changes, and government policies can impact how shares are perceived in the market. 

Economic Indicators

Factors like economic growth rates, inflation, interest rates, and unemployment shape market sentiment. For instance, inflation and high interest rates increase the cost of borrowing and slow down the economy, affecting share prices. 

Government Policies and Regulations

Governments can affect all industries through fiscal policies, tax reform, and regulatory frameworks. For instance, changes in tariffs or environmental regulations apply to certain industries. They can either benefit or harm an industry, raising or lowering stock prices as a result. 

Global Economic Conditions 

International trade dynamics, foreign investment flows, and geopolitical stability have a profound effect on stock prices. This effect can be seen in companies with global operations or export-oriented businesses. 

Events such as trade wars or currency fluctuations can lead to volatility in share prices for companies in these industries. Some contributing factors also include geopolitical tensions and currency fluctuations. 

Currency Movements

Appreciation or depreciation of the Indian Rupee against foreign currencies can impact listed companies. Moreover, they affect companies relating to imports or exports. 

If the rupee weakens, exporters benefit as they make more in local currency. Alternatively, importers may be adversely affected because of an increase in cost. 

Market-Related Factors Influencing Share Prices

Certain internal and external market forces, other than economic factors, also determine share price. From market sentiment to sectoral trends and liquidity, various factors combine to impact stock value. 

Market Sentiment and Investor Psychology

Investor mood swings driven by optimism, fear, and rumours often cause prices to move. Bullish sentiment tends to inflate prices, while bearish sentiment may trigger sell-offs. 

Speculation and Rumours

Market speculation, news reports, and social media chatter can create rapid price changes. Sometimes, these factors are disconnected from company performance. Traders may react to short-term information, amplifying volatility.

Liquidity and Trading Volume

Stocks with higher liquidity and trading volume tend to have more stable prices due to easier buying and selling. Thinly traded shares can experience larger price swings due to fewer market participants.

Technical Factors

Chart patterns, support and resistance levels, and algorithmic trading influence price trends. They also affect investor behaviour, leading to predictable price movements based on psychology. 

External Events and Their Impact

Geopolitical tensions or policy changes are examples of external events that can influence financial markets. They create volatility and affect investor sentiment, impacting stock prices and performance. 

Political Developments

Elections, government changes, policy announcements, or geopolitical tensions can impact investor confidence. This can affect stock prices, depending on perceived economic implications.

Natural Disasters and Health Crises

Events like floods, earthquakes, or pandemics disrupt economic activity and supply chains. This affects company earnings and stock prices, particularly in vulnerable sectors.

How Share Prices Increase or Decrease: The Mechanism

Share prices change through real-time trading on stock exchanges. They reflect the continuous matching of buy and sell orders. Positive news or strong earnings increase demand, pushing prices higher. Negative news, poor results, or economic uncertainties trigger sales, causing prices to fall.

Institutional investors, foreign portfolio investors (FPIs), market makers, and algorithmic traders impact prices. 

Factors Affecting the Valuation of Shares

The intrinsic value of a company's share can be determined using several methods. It varies with market demand and supply and other factors. Company fundamentals, sector outlook, and market conditions influence these metrics.

You can use the following valuation metrics to assess whether a share is fairly priced:

Valuation Metric

Explanation

Price-to-Earnings (P/E) Ratio

  • Also known as the income approach, it uses historical earnings multiplied by a price-to-earnings (P/E) ratio divided by the number of shares

  • A high P/E may indicate growth expectations

Price-to-Book (P/B) Ratio

  • Compares market price to company book value

  • Used to assess asset backing.

Dividend Yield

  • Dividend per share divided by price

  • Indicates income return.

Conclusion

Certain complex factors, in combination with each other, influence share prices in the stock market. 

They may be company-specific fundamentals, macroeconomic conditions, market behaviour, and external events. While some factors are within a company’s control, others arise from broader economic or political contexts.

Understanding these drivers can give you better insight into market fluctuations. It helps you develop a patient and informed approach to investment decisions.

Disclaimer

This content is for educational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

Frequently Asked Questions (FAQs)

Factors Affecting Share Prices
What factors cause share prices to increase or decrease?

Company performance, economic conditions, investor sentiment, global events, and market liquidity are factors that often influence share price movements.

Economic growth, inflation, interest rates, and government policies are some macro factors that impact corporate profitability and investor confidence.

Yes. Political changes, natural disasters, technological disruptions, and regulatory shifts can significantly affect valuations.

Sentiment drives demand and supply beyond fundamentals, leading to price volatility. Positive or strong sentiments can drive share prices higher and vice versa.

Strong earnings boost share prices by increasing perceived value. They also increase investor confidence in future growth opportunities. Poor earnings usually have the opposite effect.

The market price is the current trading price, whereas the intrinsic value is the true worth based on fundamentals.

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Hi! I’m Geetanjali Lachke
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Geetanjali is an emerging content writer with a passion for writing and marketing. She focuses on crafting clear, engaging blog posts and articles that simplify complex topics, particularly in finance and business. Geetanjali is dedicated to delivering insightful content that helps readers understand and navigate critical concepts, empowering them to make informed decisions and stay ahead in the ever-evolving landscape of finance and business.

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