There are many reasons why a stock price may move. Often a rise or decline in the share price cannot make sense to an investor and share price reactions to certain events can seem counterintuitive. Here we discuss the main reasons for share price movements.
As we have seen during the reporting season, stock prices have moved significantly once a company has released its results. Most of time, if the market is expecting better numbers than what was announced, then the stock price will fall. If the report is better than expected, the share price can jump up. It all comes down to the expectations of the market and whether these have been met.
Higher interest rates are generally bad news for stock markets. As companies use a debt to fund growth such as acquisitions or expansions, a raise in interest rates would make debt servicing more expensive and this will in effect impact their profits. A higher interest rate also affects the valuation calculation of the business. Hence when there is news of interest rate hikes then the stock market may react negatively to this by a sell down.
Company news is another factor which can affect the share price. Investors look at news releases everyday so when a company has negative or positive news then the stock market will react immediately to it. For instance, if a stock which in the past has been a dependable dividend stock, decides to cut their dividend, then the market will react negatively to this news as holders who have previously bought it for dividend income may reconsider holding the stock. News of an acquisition, takeovers, or divestment can affect the stock prices negatively or positively. For example, if a company has a poor performing business and the parent business decides to sell this off, then the market may react well to the news and the share price may see some price appreciation.
The stock market is closely linked to the health of the economy. If investors think the economy is weakening then the stock market will react to that. We can see during COVID in 2020, the share market had days of huge sell offs as the future of the economy looked shaky and uncertain. We also saw during the GFC, CBA falling to $23.94 in Jan 2009 as investors panicked and sold off as the economy looked worrying.
Stock prices are dictated by the buyers and sellers of the market. So no matter how fundamentally strong a stock looks, if the investors in the market do not believe in the stock, then the share prices will reflect this. There will be more sellers than buyer of the stock and this will drag the share price down. This also works in the same way with fundamentally weak stocks. We have seen companies that are fundamentally unsound as the are not making a profit but the investors believe in the stock or they believe there will be growth potential in the future and will buy the stock with the confidence it will continue to head up higher in the future. Hence the stock price has been driven by market sentiment and not by intrinsic or fundamental value.
Lauren Hua is a private client adviser at Fairmont Equities.
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