This post was originally published by Deriv on June 23, 2022
The stock market is a volatile and unpredictable place where prices are constantly fluctuating. Understanding the factors that play a part in determining price movements is crucial as it can help you take more calculated risks when you trade in the stock market. Here are a few key factors that influence stock market prices.
Supply and demand
One of the main factors that influence stock prices is supply and demand. When the supply and demand do not balance each other out, the price of stocks fluctuates. The general rule is that when demand is higher than supply, the prices rise; if supply is higher than demand, the prices drop.
For instance, when there is more demand for Apple stock but not enough stock to meet this demand, the price goes up, and if there are many Apple stocks available on the market but not a lot of demand for them, the prices fall.
Market sentiment
The prices of stocks also depend on the human factor, particularly human psychology. People tend to be driven by their emotions, which can also be true when it comes to stock market trading.
Traders can be influenced by rumours swirling around the stock market. If there are talks about a certain company making less profit than expected, traders may steer clear of the company and sell off their stocks. Similarly, if there is news about the company expecting massive profits, the surge of confidence could influence traders to buy more stocks in hopes that the stock prices would continue going up in the future.
Another example of market sentiment that could affect stock prices is affected by major geopolitical events. Traders often keep up with current affairs, and when there is tension, such as a boycott of a certain company and its products, they could anticipate a dip in profits. Shareholders in the company may then be inclined to sell some or all of their holdings, which could, in turn, cause the stock price to decline.
Fundamentals of the company
A company’s fundamentals, such as its performance, are also essential in understanding the stock market and its prices. A trader’s expectations and analysis of the changes in the company largely shape their trading habits, which in turn affects stock prices.
For instance, if there is an internal shift in a certain company, like a change in the board of directors, traders could look into the previous performance of the new board of directors and analyse whether the new management can bring more success to the company. If they expect the company to suffer losses under the new management, they may avoid trading stocks of that company. They might even sell their stocks at a slightly lower price to avoid big losses in the future. If most traders feel the same way, following the supply and demand principle and stock market timings, the price of the company’s stocks could fall because of surplus supply.
When a change happens in a company, such as rebranding, traders might think it would profit the company in the foreseeable future. Because of that, they could buy more stocks of this company with the expectation that the price will continue to rise, increasing their earnings.
Some traders may have a more accurate prediction of the stock market by relying on research analysts and making their observations based on stock market reports. You can read more about topics such as fundamental analysis to help you take more calculated risks.
Keep in mind that with Deriv, you don’t need to own an asset to trade it, which means you can potentially profit from both rising and falling prices. With your new knowledge of stock market basics, you can set clear expectations, create a good strategy, and practise with our free demo account pre-loaded with 10,000 USD of virtual money. When you’re ready, you can start trading with real money.
Disclaimer:
The information contained in the Blog is for educational purposes only and is not intended as financial or investment advice.