What affects the prices of shares?
A share price is essentially a representation of a company’s earnings as well as the dividends paid to the shareholders. In today’s globalised world, a company’s ability to make profits, and therefore its share price, cannot be attributed to simply one factor. The reality is that a large number of variables are interacting, with the net effect shaping the prices of shares worldwide. Let’s take a closer look at the major influencers and how they affect different industries:
- Exchange rates
Currencies fluctuate in value against each other 24 hours a day. As a rule of thumb, companies who import benefit when the currency of their country rises as their purchasing power rises too.
- Oil prices
Companies who are dependent on oil for the conduction of their business, such as airlines, are the first to be affected by significant or unexpected changes in the price of oil.
- New legislation
Let’s take tax policy for example. Should a country change its laws on corporate tax, this will have a direct effect on the profitability of the companies based in the territory.
- Interest rates
Interest rates are determined by the central banks and reflect the cost of capital. A cut in interest rates, for example, can give stock markets a significant boost.
- Expectations & rumours
Sometimes an event, such as an interest rate cut, might not even take place, but the stock markets can move significantly just because of the expectation. Should the event not materialize, the markets return to their usual trading levels. That’s exactly where the saying ‘buy the rumour, sell the fact” stems from.
- Unpredictable events
In this category fall terror attacks and natural disasters. The September 2011 attacks caused the stock markets to plummet, with the Dow Jones losing as much as 7% on the day following the tragic event.
Although the above factors and their effect is quite straight forward, it is worth noting that at times share prices may rise simply because the sentiment for a particular sector is positive. That’s why it is important for traders to keep an eye on the current trends. A classic example is the meteoric rise of internet shares during the dot.com era. During the same period, more traditional sectors such as mining shares were experiencing a bearish phase.