stock prices are influenced by three main factors. If you understand these factors, it will help you decide whether a price movement in a share price is a signal for a buy, a sell or a hold. These three factors that affect a share price include:
Fundamentals
Clearly, the most direct influence on a stock's price (share price) is a change in the fundamentals of the business. If revenues and profits are continously increasing, you can expect the share price to rise as investors bid to buy into the increasing fortunes of the company. On the other hand, if the profit is flat or, worse, declining with no change in sight, investors begin to abandon the stock and the price will fall. These are simple examples of changes in fundamentals. Other more complex and subtle changes can occur that may not dramatically affect the share price immediately (increased debt, a poor acquisition and so on can also trigger price changes). The point is that changes in the underlying business have a direct impact on the share price. Smart investors spot the subtle changes before they become price-movers and take the appropriate action.
Sector Changes
Changes in the stock's sector can have positive or negative effects on its price. Some sectors or industries are cyclical in nature and you should know that would affect price. However, when a whole sector begins to perform exceptionally well those companies that have solid fundamentals are pulled along with the rest of the sector.Think of bank stocks in 2006/07, in the nigerian stock exchange. When investors can"t lay their hands on the top stocks in the sector, they go for the other ones within the sector because of the general boom the sector is experiencing. Therefore, some stocks' price increases artificially if they find themselves in the right industry at the right time.
Market Swings
"The market goes up and the market goes down." That's about all you can say with certainty concerning the stock market. The market experiences bullish season and bearish season. During the bullish season,prices of stocks generally move up. In the bearish season, stock prices generally move downward. As the market moves up and down, your stock may move with or against it. Most large-cap (blue chip companies) stocks will follow the market to some degree, but smaller companies may not get the same push every time.
In general, a strong market move either up or down will carry more stocks with it than not, so your stock may be up or down for no other reason than the market was up or down.
Conclusion : How do you use this information?A change in fundamentals may be an opportunity to buy more shares of a growing company or it may signal the time to sell if the changes are for the worse. A change in the sector is usually temporary so most long-term investors will ride out dips due to these factors. However, if something drastically changes in the stock's industry due to regulation or a new technology, for example, you may want to re-evaluate your position. Is the company capable of adapting or do you own a dinosaur? Market swings that move your stock's price can be opportunities to buy additional shares (assuming all the company's fundamentals are good). If the rising market pushes up your stock's price, it may be time to take a profit on part of your holdings and wait for the price to come back down to earth to re-invest.
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