What makes share prices move
19 September 2016 | Asset classes
Like anything else that's bought and sold, shares are subject to supply and demand. But what are some of the specific factors that push a share price up or down? James Blake, head of the editorial group for Vanguard UK, explains.
James Blake: I wanted to take a minute today to talk about what moves share prices, and really, on one level it is incredibly simple, just like in any market what moves prices is supply and demand.
When we talk about supply, what we really mean is how many shares are in issue and how easy it is to get hold of them. It might be, for example, that there are lots of shares in issue, but they are all held by long-term investing institutions who have no intention of selling them, so it is not just how many, but also how easy it is to get hold of them.
Let's look at demand. That is driven mainly by news and I think that news falls into two categories. First of all, you have news on the overall market or economy, which will drive sentiment towards shares in general. Then you have news about the individual company that has issued the shares.
Turning to the economy first. We get regular updates on economic growth – that is, changes in the level of economic activity, how much companies are producing, how much consumers are buying, and so on. We get regular readings on inflation – that is, changes in the prices of things, things that you and I might buy, but also prices of raw materials that companies use to make their products. That might lead to changes in interest rates, and that affects the cost of borrowing for individuals and for companies. It also affects the level of interest that you would get if you kept your money in the bank, for example. Then we get political news – that is, important because changes in policy, trade agreements and so on can affect the overall sentiment towards the market.
Let's look at companies now. All listed companies have to provide regular updates to the market on their trading, so that is profits or earnings as they are sometimes called, and that will affect how much people are willing to pay for the shares. News on new products will also affect demand for shares. If there is an exciting new product, it might make investors think that the outlook for products has improved. On the other hand, if a product is coming to the end of its lifecycle, a patent is expiring, then that might have a downward impact on demand for shares. Corporate activity is another source of company news. If the company is taking over one of its rivals, or indeed being taken over itself, that will affect demand for the shares. Then we have news about the company’s management. If there is a well-regarded management team that is moving on, that might be taken badly by the market. However, if the management team is not so well liked and they are being replaced, then that might increase demand for the company’s shares.
So demand is driven by news – that is news on the economy and on the individual company. Supply is how many shares there are and how easy it is to get hold of them, and it is the interaction between supply and demand that drives share prices.
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