7 Key Factors Affecting Share Prices



By Jason McIntosh

Like many financial assets, share prices rise and fall according to shifts in supply and demand. The concept is simple: If more people want to buy a share than sell it, demand goes up, and so does the price. And if the supply is greater than the demand, the price falls.

When supply and demand are equal, share prices may fluctuate slightly, but we won’t see any significant changes until one factor outweighs the other. This means the market and buyer-seller dynamic are what really determine what a stock is worth.

Here are 7 key factors that shape stock prices…

Supply factors that affect share prices

Shifts in supply affect how much you’ll pay for shares in both the Australian and global markets. As you teach yourself about shares, it’s helpful to keep these factors top of mind.

1. Share buyback

Companies may buy back their own stock from investors, and this is known as a “share buyback.” They pay shareholders the market value per share, and then usually cancel the shares.

A share buyback is an intentional way to reduce supply. It reduces the total number of shares in circulation, which can boost the share price or the company’s earnings per share (EPS).

2. Share issues

On the flipside, a share issue is when a company releases new shares to the public and increases the number of shares in the market. The increase in supply will often result in downward pressure on the share price.

3. Investors selling shares

When investors feel like shares are losing value, they often sell their shares to protect their capital. This adds more shares to the market, but if the demand doesn’t match the newly increased supply of shares, it’s likely the price will fall further.

Demand factors that affect share prices

The more investors want to buy a share, the more valuable it becomes. Demand can push up a stock’s value, and it has a very real effect on investors’ buying decisions. If you’re familiar with stock surges or “buying frenzies,” those are examples of high demand in action.

Motion Trader’s algorithms are designed to identify shifts in demand. This can help alert members to buying opportunities, often at a relatively early stage.

Here are the main factors that drive demand in the stock market.

4. Company news

How do you read the share market? By reading the news! Any expected or unexpected developments in a company influences investor sentiment and causes the share price to change.

Positive news can hike up share prices as investors scramble to buy shares. Think: a new product launch, profitable quarterly earnings report or dividends announcement.

Negative news can swing investors in the opposite direction and decrease demand. So, employee layoffs, the death or departure of a key figure in the company, an anticipated takeover, or the release of an earnings report that reveals missed targets or accounting errors don’t bode well with investors.

Outside of company news, any industry or global economic developments can affect demand. Unforeseen political events, changes in government, negotiations between companies, mergers and acquisitions and even natural disasters can all cause investors to rethink their portfolio.

5. Economic factors

Investors always have an eye on the prize: profits. Any changes in the local economy can cause demand for shares to rise or fall. This means that a company’s share price may not always reflect its business performance.

The key economic factors to keep in mind are:

• Interest rates: Central banks can lower or raise interest rates to stabilise or stimulate the economy. If a public company takes out a loan, a higher interest rate will increase their debt and reduce potential profits and the dividends it pays shareholders. This may make investors wary and turn their attention to higher yielding investments. Higher interest rates may also slow the economy, which could impact company profits.

• Inflation: This drives up the price of everyday purchases and can slow sales, lower profits, and often leads to higher interest rates. These are all changes that tend to decrease demand.

• Deflation: On the other hand, falling prices lead to lower profits and less economic activity. Share prices go down and investors often start selling their shares in favour of fixed-income investments.

• Economic outlook: A pick-up or slow-down in economic activity affects demand. If the economy is growing and companies are starting to spend more confidently, share prices may rise along with demand. But if the economic outlook is uncertain, investors may sell their shares, which is what we typically see during a recession.

• The value of the Australian dollar: If the price of the dollar falls, it’s cheaper for people around the world to purchase Australian-made products. This can boost share prices and demand. And if the dollar rises, stock prices may go down as Australian exports become more expensive.

6. Industry trends

Competing companies are subject to the same market conditions, so their stock prices often move in tandem. This has wide-reaching effects on demand: if an industry is booming, demand for shares in that sector could skyrocket, pushing up the share price for various companies.

On the same note, a company’s share price may rise or fall depending on how their competitor is performing. Investors will want to buy shares in the more profitable company.

7. Market sentiment

This refers to the overall way investors are feeling about the market, or specific shares. Since many investors are influenced by the mood of the market rather than concrete facts and figures, sentiment has a huge impact on demand.

For example, share prices and demand can drop if an earnings report doesn’t meet investors’ expectations.

Generally, demand is higher in a bull market which is typically tied to an economic boom or recovery, like after a recession. Investors are more likely to open their wallets when the stock market is strong and share prices are rising.

In a bear market, investors have less confidence, so they typically pull back on their investments. The result? Falling demand and share prices.

How to analyse share price changes

Many of the most successful investors analyse share prices. By making analysis a part of your trading strategy, you’ll be better able to identify new opportunities and potentially profit from share price moves.

This short video explains the steps to systemise your analytical style:

Give these tried-and-tested techniques a go.

Fundamental analysis

This means doing an in-depth study of a company’s financials to determine the value of its shares. There are two key areas to analyse:

• Earnings per share (EPS): This is your return on investment, and it determines a company’s profitability for each unit of shareholder ownership. When you buy a stock, you’re essentially buying a proportional share of a future stream of earnings within a company.

• Price-to-earnings (P/E) ratio: This compares a company’s recent EPS to the market price of a share and gives you an idea of what you’ll pay for a company’s future earnings. You’ll usually see the P/E with a number that’s a multiple of the company’s earnings and it’s useful when looking at companies in the same industry. The lower a company’s P/E, the cheaper their shares which often means they offer better value to investors.

Technical analysis

Technical analysis uses historical share prices to identify opportunities. All the demand factors mentioned earlier are reflected in the share price history. Investor can then use share price charts to look for patterns and trends in stock prices.

Quantitative analysis

Finally, this approach relies on algorithms to uncover patterns in share price data. A big advantage of this approach is that it can quickly analyses an almost unlimited number of stocks. It’s also consistent and free of human emotion and biases. This can help people make informed data driven decisions.

Motion Trader uses algorithms to identify opportunities in ASX stock. Our algorithms use a set of investment rules to determine the entry point for stocks that meet the criteria. They also calculate a precise exit level for each stock. The aim is to help our members make better decisions.

Click here if you’d like to apply a systematic strategy to your portfolio

Jason McIntosh | Founder, Motion Trader

Jason’s professional trading career began over 3 decades ago. He’s a founder of two stock advisor firms, a listed funds management business, and has helped thousands of investors navigate the stock market. Click here to read Jason’s incredible story of, at age 20, sitting alongside some of the world’s greatest traders (and the life changing experience that came with that).

Meet Jason

I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney. 
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.