The first question any new investor asks on entering the stock market is why do stock prices fluctuate?
While there is no direct answer to this, there are many factors that play a role. They govern the magnitude and direction of the movement of a share price.
Published on 22 March 2023
You may be hesitant to invest in the stock market due to stock market fluctuation. But, through this blog, we will explore the potential factors that lead to fluctuations in the prices of shares so that you can trade with confidence.
Stock prices change due to the demand-supply equation. After all, the stock market is a market. So, like the price of products in any other market, demand and supply affect the price of shares.
If the demand for a particular stock rises, its price also rises. As every sale attracts more investors, the price continues to increase. Similarly, when the demand for a particular share falls, the number of bidders reduces, thereby pulling the stock price to fall.
After understanding how stock prices change, it is vital to learn why do stock prices fluctuate every second? Investors who recognise the factors driving stock prices can manage their portfolios more efficiently.
The demand for a particular stock is driven by the investor and market sentiment. Simply put, the perceived risk-return reward of investing in a company and some external conditions affect stock prices. Here’s a look at the top factors influencing stock prices:
1. Company revenue
Investors decide to purchase the shares of a company after evaluating its worth and projected earnings in the long term. More investors are attracted to companies that are making good profits. As a result, its share price increases. Companies listed on the stock exchange need to declare their earnings every quarter and annually. They must submit a Quarterly Report or Earnings Report.
When the report of a company indicates good earnings or good growth, it will automatically attract more bidders, increasing the demand for its share. But, as an investor, you must see if the company has been able to meet or exceed projected earnings. If yes, there will be an increase in its share price. But, if the company’s performance is poor and projections are not met, the chances that its share price will fall are high.
2. Market trends
Bull and Bear are common terms used in the stock market. They indicate phases that cause a stock market fluctuation.
Such market trends impact companies, irrespective of their performance. Their cause is rooted deep in some economic changes and lasts for a few months.
3. Reserve Bank of India (RBI) policies
The RBI introduces new policies every few months. Changes in such financial policies can cause stock fluctuation. The Indian stock market is often affected by modifications in the repo and the reverse repo rates.
4. Value of Indian currency
Another factor affecting share prices is changes in the Indian currency exchange rate. When the rupee is strong, companies, especially in exports, benefit. As a result, there is a significant increase in their stock prices. Companies working on imports see an opposite effect with their stock prices falling. Changes in the exchange rate cause market volatility, leading to stock market fluctuation.
When the price of goods and services increases over a period, it is known as inflation. If the inflation rate is high, individuals avoid investing. As a result, companies and the general public see uncertainty in economic growth. Some companies listed on the stock market halt production and postpone their investment, resulting in negative economic growth.
The value of savings also falls with a fall in the value of money. The stock prices of luxurious product manufacturers and companies also tend to suffer since nobody is interested in investing in them. So inflation doesn’t just eat people’s purchasing power only but also deteriorates their investing power.
Once you understand the factors affecting share prices that lead to their rise or fall, you can open your trading and Demat account to begin trading on the stock market. Many online trading platforms allow you to open an online trading and Demat account within minutes.