Technical Factors that Affect Stock Prices (1)

Movements in the stock market are governed by a number of factors that could be fundamental or intrinsic to the stock itself, based on its environment, as well as a number of technical factors.

Much of what we do in the stock market as well as whether we succeed or fail, depends largely on the movement in the prices of the stocks we have invested in. These movements are governed by a number of factors that could be fundamental or intrinsic to the stock itself, based on its environment, as well as a number of technical factors.

In today’s article, we would be reviewing the technical factors that govern price changes or cause price volatility.

These factors represent external conditions that alter the supply of and demand for a company's stock and a clear understanding of what they are will certainly help you make better decisions as an investor. They include:

Inflation Rate

The basic definition of inflation is that it is a sustained increase in the general price level of goods and services in an economy over a given period of time.

The most apparent influence of the inflation rate is what we all experience as citizens of a country and it is simply that when prices are higher, we have less money to purchase items.

In other words, inflation indicates a decrease in the purchasing power of a nation's currency. In the stock market, low inflation is known to drive high multiples and high inflation also drive low multiples. For clarity, multiples are used by investment bankers and financial analysts to determine how much investors are willing to pay per naira of earnings. Also, inflation makes you pay more for less as prices increase without a corresponding increase in value.

Dividend stocks are especially affected by inflation as income stock prices generally decline. When inflation is on the rise, prices are generally higher, you purchase less for your money’s worth, and profits also decline.

While you are not in control of inflation as an investor, it will do you good justice to adjust for inflation when projecting your expected gains. It will help you control your expectations.

Market Sentiment

Market sentiment is the ‘sentiment’ the market has on the stock market. It is the prevailing attitude of investors based on their anticipated price changes in a market. It is the psychology of investors and market participants as a whole and individually.

Their mindsets individually or collectively are based on things like economic information, price history, seasonal factors, and more. This is also something you cannot control as an investor as it is the overall sentiment that affects the prices of your stocks. Market sentiment is generally subjective and biased.

However, it is not always bad. Where investors believe that the market will turn for good or that a certain industry will perform well in a given period, they will generally buy more, and the increased demand will increase the price of the stocks that fall under such market or industry.

Investors will generally overemphasize whatever information that comes and their thoughts of it is enough to drive how the market moves. So even when you see otherwise, you generally have to wait for the rest of the investors in the market to see it as well.

General News

One of the main factors that influence market sentiment is the news. News here could be worldwide, political, economic, or even from happenings in the companies themselves.

A company’s divestment or the introduction of a new business line could spur a generally positive or negative sentiment in the stock market and cause the prices to fluctuate even before anything happens. Mergers and acquisitions can also affect this.

Unexpected events like wars and economic dips could also affect it. This is even more so as the world is now interconnected. A change in the economy of China could affect the economy of Nigeria and drive investors towards one sentiment or the other.

The above are just some of the ways volatility occurs. While they are generally out of our control individually, an understanding of them will aid your decision-making process and help you put effective systems in place to mitigate them.

Written by Lawretta Egba.