Various political and economic factors are always at play influencing equity price movement. The equity market exists as a deliberate way of linking companies with investors. Investors lend their money to companies by buying the respective shares. The price at which they buy these shares is determined by market forces and other macro and microeconomic fundamentals. In this article we briefly explore some factors driving the rising and falling of equity prices.
Why There Is A Stock Market In The First Place
The stock market exists as a way of enabling companies to sell pieces of their business as equity securities (stock). Investors will buy the equity and can also trade the shares amongst themselves for a profit. Buying equity means you become a part owner of the company who stands a proportional chance to the company’s profits. Profits made by a company will be shared amongst shareholders as dividends.
The stock market is an important capital tool for listed companies. However, once a company is listed it can de-list at any given time. History is littered with companies that failed to meet operating standards and had to be removed from the stock exchange. A case in point relates to the 2004 suspension of companies such as CFX Bank, Trust Bank, Barbican Bank as well as First Mutual limited.
Corporate Earnings As Drivers Of Share Price
Given the economic role of capital markets, shares are always on demand. Investors are also biased towards shares that have a high prospect for growth and dividend payout. Such shares may well be categorised as blue chip shares. This share class belong to companies known for their ability to make profits in good and bad times. Companies in this share class also exhibit limited possibilities of delisting or exposing investors to high risks.
Blue chip shares often rise in prices much faster than other share classes. Hence, because of their generally good characteristics, blue chip shares can become less liquid. To this effect, the less liquid the share is, the more difficult it is to get it. As a result new investors are forced to pay a premium in order to get the greater majority of blue chip shares.
Mergers, De-Mergers And Take Overs Influence Share Price
Company mergers, de-mergers and takeovers affect share prices in a number of ways. The investing public might perceive a company’s transaction to be detrimental to their holdings and decide to sell. When a more investors share the same sentiment, a massive sell off will send the share price tumbling down. Share price is also affected when a company undertakes a de-merger process. Here a company makes attempts at refocusing its operations by unbundling part of its business structure. The process of unbundling refocuses the core business operations as directors strive to increase shareholder value.
How Government Policies Influence Share Price
People’s willingness to buy or sell shares on the stock market is also influenced by government policies. Quite recently, the government of Zimbabwe proposed changes to the monetary policy and the market crashed. The proposed new system of taxation has also limited stock market activities thus pushing down share prices. The Zimbabwean economic problems since 1998 have always prompted government to issue policy interventions that have always had a material impact on the share value of listed companies.
Investor Sentiments Impact Share Price
Investor perceptions have a bearing on equity prices. In a bullish market prices are expected to rise while in a bearish market a fall is expected. This adds to the level of confidence an investor may have regarding the general economic outlook. Government policies also shape investor perception and drive their efforts to guard against negative material impact on share prices. Investor sentiments therefore create the seasonality/rhyming pattern of stock markets while projecting a reactionary trend towards government policies.
Market Liquidity and Stability Influence Share Price
In a liquid market, investors always have extra funds to buy shares. This norm leads to a rise in the respective share price as there will be more buyers. The same also applies in an unstable economy characterised by a hyper inflationary environment. In such an economy money is constantly losing value creating a need to preserve its value. The stock market is one such avenue for preserving the value of money in an inflationary environment. Resultantly, equity prices will rise or fall in respect to how liquid the market is.
