2. Understanding what moves stock prices
2. Understanding what
moves stock prices
Stock trading is all about taking advantage of stock price movements and so one of the key elements of your market analysis will be understanding what moves the prices of different shares.
After a company sets a price at which it will list on a stock exchange any subsequent price fluctuations are the result of any changes in the supply and demand for the stock. The supply of a company’s shares is relatively easy to understand; it’s always limited and known. Even when a company decides to buy back or issue more shares, the total number of shares in circulation is always known.
On the other hand, demand works a bit differently. If more people want to buy a company’s shares compared to those who want to sell, demand increases and the stock price increases as well. Conversely, when sellers on the market exceed buyers, demand decreases and the stock price falls. While supply is always known, demand fluctuates over time. Several factors contribute to this fluctuation including:
2a. Macroeconomic data: The state of the economy and the political landscape a company operates in will affect its growth, and ultimately, its share price. Data such as GDP, retail sales, and government policies can affect the number of people willing to buy or sell a company’s stock, causing the price to rise or fall.
2b. Company earnings reports: A company’s share price will depend, to a large extent, on the company’s performance and many traders will use figures such as earnings per share (EPS), revenue, and profit when they do their fundamental analysis. Poor performance will likely result in less demand for a stock.
2c. Market sentiment: The view that market participants and the public have on a particular stock can cause demand to fluctuate. Unlike fundamental or technical analysis, market sentiment is subjective and often biased, nonetheless, it has the power to increase or decrease demand. For instance, a stock’s growth prospects can be good according to fundamental analysis but a single piece of negative news can cause demand to decrease and affect prices significantly, especially in the short-term.
2d. The economic strength of peers: In addition to performance, a company’s stock price tends to move in line with the demand and prices of other stocks in the same sector or industry.
2e. Interest rates: When interest rates are lower, people have more money to spend and this tends to increase demand for stocks. When interest rates are higher, people have less to spend and so demand tends to fall. So, for instance, if it seems likely that a central bank is about to increase interest rates, demand for stocks may decrease.
3. Creating a good trading plan
A good trading plan is at the core of many traders’ success. A good trading plan outlines aims, expectations, trading style, risk appetite, as well as money and risk management rules that include when to enter and exit trades. A plan will not only give your trading some structure, but it will also help you with educated and sound-decision making that increases your chances of succeeding in the market.
FAQs
Stocks are generally seen in companies and not in other forms of business structures. Equity includes stocks as well as other tangible assets excluding debt.
What is the difference between stock and equity market? ›
The terms equity market and stock market are synonymous. Both refer to the purchase and sale of ownership shares in public companies through any of the many stock exchanges and over-the-counter markets in the U.S. and around the world. A share of stock represents an equity interest in a company.
Is it better to have shares or equity? ›
Generally, equity investments are for the long term. read more, while share investments are for the short term. The primary aim of equity investors. read more is to profit from investments and appreciate their value, while share investors intend to enjoy short-term price movement.
What are the 4 types of share market? ›
The four types of share markets are the primary market (for new securities), the secondary market (for existing securities), the equity market (for stocks), and the derivatives market (for financial contracts based on underlying assets).
Is the stock market also known as the equity market? ›
What Is an Equity Market? An equity market is a market in which shares of companies are issued and traded, either through exchanges or over-the-counter markets. Also known as the stock market, it is one of the most vital areas of a market economy.
Are equities riskier than stocks? ›
Equities are generally considered the riskiest class of assets. Dividends aside, they offer no guarantees, and investors' money is subject to the successes and failures of private businesses in a fiercely competitive marketplace. Equity investing involves buying stock in a private company or group of companies.
What is equity market in simple words? ›
An equity market is a platform for trading shares or stocks of publicly listed companies. It provides a space where buyers and sellers come together to trade shares in a transparent and regulated manner.
Why do investors prefer equity? ›
Pros Explained
Equity financing results in no debt that must be repaid. It's also an option if your business can't obtain a loan. It's seen as a lower risk financing option because investors seek a return on their investment rather than the repayment of a loan.
Does real estate outperform stocks? ›
As mentioned above, stocks generally perform better than real estate, with the S&P 500 providing an 8% return over the last 30 years compared with a 5.4% return in the housing market.
Do investors prefer debt or equity? ›
SHORT ANSWER: All else being equal, companies want the cheapest possible financing. Since Debt is almost always cheaper than Equity, Debt is almost always the answer.
Overview: Swing trading is an excellent starting point for beginners. It strikes a balance between the fast-paced day trading and long-term investing.
What is the most profitable market to trade? ›
Day traders commonly choose the forex market for its low barriers to entry as well as exchange-traded funds. Long-term investors are often attracted to the commodities market and the market for contracts for difference.
Which type of trading is most profitable? ›
The defining feature of day trading is that traders do not hold positions overnight; instead, they seek to profit from short-term price movements occurring during the trading session.It can be considered one of the most profitable trading methods available to investors.
Are bonds considered equity? ›
Bonds are loans from you to a company or government. There's no equity involved, nor any shares to buy. Put simply, a company or government is in debt to you when you buy a bond, and it will pay you interest on the loan for a set period, after which it will pay back the total amount you purchased the bond for.
What is the largest stock market in the world? ›
There are approximately 55,214 listed companies worldwide as of December 2023. Though the Americas and Europe have large numbers of listed companies, significant growth comes from Asia. The largest stock exchange in the world is the New York Stock Exchange.
What is the difference between a share and a stock? ›
Definition: 'Stock' represents the holder's part-ownership in one or several companies, while 'share' refers to a single unit of ownership in a company. For example, if X invests in stocks, it means that X has a portfolio of shares across different companies.
What is an example of an equity market? ›
Some of the most well-known and largest equity markets are: New York Stock Exchange (NYSE) – United States. Nasdaq (NASDAQ) – United States.
What is the meaning of stock or equity? ›
A stock or any other security representing an ownership interest in a company. On a company's balance sheet, the amount of funds contributed by the owners or shareholders plus the retained earnings (or losses). One may also call this stockholders' equity or shareholders' equity.
What is 100 shares of stock called? ›
In stocks, a round lot is considered 100 shares or a larger number that can be evenly divided by 100. In bonds, a round lot is usually $100,000 worth. A round lot is often referred to as a normal trading unit and is contrasted with an odd lot.
Why are equities called stocks? ›
In conclusion, stocks are called equities because they represent ownership in companies. They let investors benefit from growth but also have risk when business conditions weaken. Next time, we'll explore the differences between stocks and bonds.
