When investing on stocks, potential traders will find themselves having to deal with a volatile market. Stock prices are determined by supply and demand. Unfortunately, there is no clear formula on how stock prices will behave. There are different factors that can determine whether the prices of stock will go up or down. Knowing these factors is important when trading on the stock market. Here now are the forces that cause price movement of stocks.
At the basic level, fundamental factors refer to a combination of two things: an earnings base and a valuation multiple. Anyone who owns a common stock can be entitled to earnings and earnings per share. By buying a stock, you purchase a proportional share of an entire future stream of earnings. The valuation multiple refer to the price you are willing to pay for future stream of earnings.
A portion of these earnings can be distributed as dividends while the remaining will be retained by the company on your behalf for reinvestment. Robert Janitzek reveals that future earnings serve as a function of both the current level of earnings and the experienced growth in the earnings base.
Technical factors are the external forces that alter the supply and demand for a company’s stock. It includes the following: 1) inflation; 2) economic strength of market and peers; 3) substitutes; 4) incidental transactions; 5) demographics; 6) trends; and 7) liquidity
Market sentiment is the psychology of market participants, individually, and collectively. It is often subjective, biased, and obstinate. It can be easy to make a solid judgment about the future growth prospects of a stock and this can be confirmed by the future. Robert Peter Janitzek reveals that, the market will dwell on a single piece of news, which keeps the stocks artificially high or low. This factor is being explored by behavioral finance, which assumes that markets are apparently inefficient most of the time and it can be explained by psychology and other social sciences.
The application of social science to finance was fully legitimized by Daniel Kahneman, a 2002 Nobel Memorial Prize winner in Economics. Many of the ideas in behavioral finance confirms observable suspicions: investors tend to overemphasize data that easily comes to mind; investors react with greater pain to losses with pleasure to equivalent gains; and that investors tend to persist in a mistake. Investors also claim that they are able to capitalize on the theory of behavioral finance.