The market value of shares and stocks of a company is a very important indicator of how well it fares in the present market scenario and also of the investors’ understanding of the company’s business prospects. Share market value of every company is influenced by a lot of factors that work simultaneously in the economy, and hence, the market value of shares and stocks are bound to oscillate significantly as the economy continues to progress through the different stages of the business cycle.
Let’s have a look at five factors that influence the share market value of a company.
- The Forces of Demand and Supply
The forces of demand and supply are the two fundamental economic factors that influence the market value of shares. If the demand for the shares/stocks is less than their supply, the value of the shares usually escalates. Contrarily, if the supply of shares exceeds the demand for them, the value of the shares will fall.
- Business Cycle
The business cycle, also known as the trade cycle, refers to the cyclical fluctuations that occur within an economy. There are five phases of a business cycle – expansion, peak, recession, trough, and recovery. All the five stages affect share value differently. For instance, during the peak condition, share prices will be soaring high whereas, during the depression stage, share prices will fall at an all-time low. Similarly, during the recovery period following the depression, share prices will show an upward trend.
- Investor Sentiment
Investor sentiment essentially denotes the confidence, preference, and inclination of the investor to invest in shares corresponding to the prevailing market conditions. There are two economic terms to describe market conditions:
- Bull market – A bull market refers to an excellent market condition where the share/stock prices continue to show an upward trend, thereby, increasing the confidence of the investors. This often occurs during an economic recovery or an economic boom. Optimism and high investor confidence are two primary features of the bull market.
- Bear market – A bear market refers to the market where the share prices show a downward trend. It occurs during an economic recession. Investors generally do not want to invest in such market conditions. Bear markets are characterized by pessimism and rapidly falling prices.
- Industry Performance
Industry performance of a company also impacts its share market value. For instance, if there exist cohesion and collaboration between the employees and the management wing, it will lead to a smooth operations process that will further lead to enhanced productivity. Higher the productivity of a company, the higher up will its share prices go.
Furthermore, companies within the same industry often have correlating share prices, since the prevailing market conditions within a particular industry will affect all the businesses more or less equally. However, there may also be certain situations where a disadvantage on the part of a rival firm may bring good news for another’s share market value if both the companies are competing for capturing the same market and audience.
- Government Stability
There’s been a positive correlation between stable governments and share market prices since ages. This is primarily because a stable government means that the economic conditions are stable too. Entrepreneurs can expand their businesses and scale productivity while investors can confidently invest in businesses. In such a situation demand and supply also remains in a harmonious state and hence, share market value scales up. It is quite on the contrary if the government is unstable. When people cannot have faith in their government, it impacts everything around them, and the economy obviously suffers.
While these are just a few factors that influence the share market value of a company, there are many other factors such as political relations, foreign investment, bank rate, and so on, that also affect the share prices in the market.