Although investor sentiment plays into a stock’s price in the form of demand vs. supply, there are numerous factors that influence investor outlook. These include a company’s fundamentals, its performance history, as well as economic or geopolitical news that may impact not only that company but an entire sector.
These elements in turn can influence whether investors believe a stock will go up or down.
For investors interested in buying stock, it’s important to understand the various ingredients that can determine stock price, even though what influences a stock’s price per share can change at a moment’s notice.
Key Points
• Investor sentiment, as expressed through supply and demand, is the main driver of a stock’s price.
• Depending on what’s going on in the news, in the markets, as well as larger economic trends, investors may be bullish or bearish on a company or sector.
• Thus, investor behavior determines stock price, based on a host of external factors, including company fundamentals.
• In order to invest in stocks, investors must understand the key factors that determine stock price — which can vary from company to company, sector to sector.
• Owing to market complexity, as well as ever-changing investor sentiment, there is no way to predict price movements with 100% accuracy.
7 Factors That Determine Stock Price
Beyond the basic principles of supply and demand, there are other factors that contribute to changes in stock prices. Those include investor behavior, the news cycle, company fundamentals, and more.
1. Investor Behavior
A current stock price is based on investors’ beliefs about the future success of a company. Hypothetically, if investors have reason to believe that a company will be successful in the future, they may invest in the company, causing the price of shares to increase. This is an important aspect of stock trading basics.
Similarly, if the outlook for a company is negative, investors may sell off the shares they own, causing the price to decrease.
Basically, if a few million people think that Company X is going to be successful in the near future, and that shares of Company X will see price appreciation that could lead them to buy the stock, increasing demand, which could drive up the price per share.
Emotions such as fear, panic, anxiety, greed, and hope can have a significant impact on investor behavior. This is the basis of the field of behavioral finance and understanding investor sentiment. There are many different ways investors try to predict the future success of companies.
2. Company News and Data
Stock price predictions can be made based on reading stock charts and making calculations, as well as looking at news stories, fundamental analysis like reading over company earnings and reports, and other information.
News about changes in management, production, company or industry scandals, and other stories can influence investors’ view of a company, and cause share prices to change quickly.
3. World Events
Beyond news and outlooks specifically related to companies, global factors can also influence investor behavior. For instance, a presidential election, a pandemic, political unrest, or signs of a recession can create panic in the market, influencing investors to sell off stock shares in order to avoid losses, or put their money into safer investments.
Usually there is some up or down price movement in stock prices, and some stocks are more volatile than others. It’s rare for prices to completely remain static. It’s also rare for prices to drastically increase or decrease suddenly, but this is what happens during a market crash.
A market crash can happen when many investors begin to sell, creating a snowball effect where more and more investors pull their money out of the stock market. At that point, the market could plummet, resulting in losses that wouldn’t have occurred if people hadn’t sold.
4. Stock Buybacks
Another factor that can affect stock price is company buybacks of stocks. Companies will sometimes buy back their own stock from investors, thereby reducing the supply of shares available to the public. They do this in an attempt to increase stock prices.
If companies issue more shares of stock, they are increasing the supply, which can cause the price to decrease.
5. Primary and Secondary Markets
When some companies first start selling stock to the public, they hold an IPO, or initial public offering. At the time of the IPO, an initial share price is set and investors can begin to buy the stock at that price, which is considered a primary market.
After the IPO ends, the stock gets listed on stock exchanges (or secondary markets) and the price starts to fluctuate as shares get bought and sold — and supply and demand begin to play a role in share price.
When companies don’t have an IPO, their shares get bought and sold privately, in which case share price is determined between the buyer and seller.
6. Stock Valuation
The valuation of a stock is made by looking at the company’s past and projected earnings, large trades made by institutional investors, overall market trends of the S&P 500, and ratios and calculations made by analysts.
Four ratios and calculations that are used to determine the valuation of a stock are price-to-earnings (P/E) ratio, price-to-book (P/B ratio), price-to-earnings-to-growth (PEG) ratio, and dividend yield. These calculations can help investors figure out whether a stock is currently undervalued or overvalued.
7. Bid and Ask Price
A share price ultimately gets determined through the bid, ask, and sale price on stock exchanges. The bid price is the maximum amount an investor will pay for shares of a stock, while the ask price is the lowest price a seller will accept. When the two prices match up, a sale is made, and that price sets the new price per share of the stock. Ultimately it gets down to what someone is willing to pay and if a stock owner is willing to sell to them at that price.
What someone is willing to pay or sell for is determined by psychological and market factors, as discussed. If a buyer thinks the stock is undervalued at the asking price, they will buy, and vice versa. Generally the difference between the bid and ask price isn’t very large, but if a stock’s trading volume isn’t particularly large, it can be.
Companies that are a similar size or have a similar valuation can have very different share prices because the number of shares each company issues can differ greatly.
Because of different company market caps and numbers of liquid shares, the share price doesn’t reveal much about the actual value of the company, and one can’t use share prices to compare companies. However, the share price does reflect what investors currently think the stock of a company is worth.
How to Handle Changes in Stock Price
Attempting to time the market is extremely challenging because there’s no way to reliably predict market movements. For example, an investor could sell at what they think is the peak of the market, only to watch the price continue to rise.
Historically, the stock market has continued to rise over the long term, despite plenty of ups and downs along the way. Although past trends are never a guarantee of future outcomes, it’s likely that investors with a longer time horizon, who are willing to hold onto their stocks throughout up and down cycles, may eventually see positive returns.
That said, market volatility can provide opportunities to invest when the stock market is down, or sell at higher prices, especially if they were already considering buying or selling a stock.
The Takeaway
Ultimately, supply and demand drive stock prices — which is informed by market conditions, world events, and investor behavior, among other influences. Although there is no way to look into the future to predict share prices, investors tend to look at past performance, charts, and market trends to attempt to predict price movements. In general, it’s best not to try and time the market, but to focus on building a solid long-term portfolio that will grow over time.
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FAQ
What are three things that determine a stock’s price?
Broadly speaking, the three main factors that drive a stock’s price are economic/market conditions, company performance, and investor sentiment. These three factors are interdependent, with one influencing the other.
Who or what controls the price of a stock?
There isn’t one sole entity that influences the price of a stock, and owing to the interplay of factors in the stock market, there is no single source of control over a stock’s price.
What makes the price of a stock go up?
There is no way to predict whether a stock’s price will rise or fall, but generally speaking investor demand is what ultimately drives up the price of a given company. But there are numerous factors that play into investor demand.
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