For all investors the performance of a company’s share is a pretty good indication of whether it is worthwhile to purchase stock in the company. Usually, if the price of a share has been falling consistently shareholders will sell their shares while a share whose price is soaring will be attractive to investors.
One of the factors that affect the share price of a company is demand. This demand or lack of demand pushes the share price higher or lower respectively and thus contributes to the performance of the share. Demand does not work in isolation it acts simultaneously with supply to affect the performance of a share. Picture this: the price of share A is 20/- and 100 shares are available in the market, if 200 people each want to buy one share the competition will push the price up from 20/- to say 40/- and all the investors who are unable to pay the 40/- will drop out leaving investors who can. The share price will keep rising until 100 people who can afford to buy the share at that price are left. The forces of supply and demand are known as the market forces and are the main factors that affect the share price.
What causes this demand?
The main cause of demand is expectation. This is what the market anticipates about the performance of a share. It is usually caused by news or information of the company. For instance, if investors believe that a company will report a loss this year they expect that the price of the share will fall. Shareholders will then sell their stock and this will push the price to fall even further.
Other factors that influence the performance of a share are:
Market sentiment: The price of the stock of a company is affected most of the time by the general market direction during a session. In a bull market, an optimistic market, the stock price of most companies will rise and in a bear market, a pessimistic market, the stock price of most companies will fall. One can gauge the market sentiment by looking at stock indexes and the trend the indices has been following. If the NSE 20 share index has been steadily increasing over a particular duration then the market is bullish, if it has been falling then the market is bearish.
The performance of the industry: The performance of the sector or industry that the company is in also plays in part in determining the stock price of the company. Most of the times, the stock price of the companies in the same industry will move in the same direction. This is because market conditions will generally affects the companies in the same industry the same way. As with all things there are exceptions to this. For example a competitors misfortune may benefit a firm.
The earning results: The main objective of a company is to make profit. Therefore, investors and traders always assess a company based on its Earning Per Share and Revenue and its future earning potential. In Kenya, companies report the earnings results every quarter-yearly. A company that achieves good results expects a boost in its share price and one that delivers poor earning result shall see a drop in its share price.
New product introduction to markets: The introduction of new product to market is seen as a revenue enhancer for a company. This also applies to an existing product that breaks into new markets. Sometimes, the news of a new product introduction is enough to improve the stock price of a company.
Dividends: After the announcement of a dividend the stock price may increase by an amount close to the dividend per share value. However, the stock price may drop on the ex-dividend date, the date on which the register closes for shareholders entitled to dividend payments as they would not be entitled to the corresponding dividend payment.