Question

In recent times company X has started to experience a much slower growth in earnings than the 30% to 40% rate it had experienced in the past. At the same time, the stock price fell from the $50 range to under $30. In your own words, why did the value of the company X's stock change?

Answer 1

Causes for fluctuation in price of shares

1. Demand for the share causes price fluctuation

If the supply of a particular company’s share is more than the demand in the stock market, it will sell at a lower price. The demand for a share is determined by several factors most of which are related to the yield from the share. If a company pays 15% on its equity shares whereas the general expectation about the return in the industry is only 10%, such a share will attract a large number of buyers.

2. Bank Interest Rate causes fluctuation in share price

When the ‘bank rate’ is low, the nationalized banks provide loan to their customers at a lower rate of interest (Bank rate is the rate at which the Reserve Bank discounts the eligible bills in the possession of the banks). A lower rate of interest induces the customers to borrow more in order to speculate in securities. This results in a rise in the price of securities that are actively traded.

When the bank rate is high, the banks cannot provide credit on liberal terms. As a result, less money will be borrowed from the banks for speculative purposes. This results in a fall in the price of securities.

3.Underwriting influence price fluctuation in shares

The actions of the ‘underwriters‘ of the shares of a company may also cause fluctuations in the price of shares. An underwriter is a person who guarantees minimum subscription for the shares of a company. In case minimum subscription is not attained, the underwriter has to buy the shares himself. With a view to creating a good demand for the shares of the company underwritten by them, the underwriters may start buying up the shares through their agents. This may create an artificial demand in the market as a result of which the share price may go up.

4. Buying behavior of Institution Investors causes price fluctuation

If institutional investors like the L.I.C., I.D.B.I., I.C.I.C.I., etc., decide to buy the shares of a particular company, the general public will start showing interest in such shares as a result of which its price will shoot up.

5. Financial position of the company causes price fluctuation of shares

The financial position of the company also plays a crucial role in the determination of share prices. It is only the financial position that actually determines the ability of the company to pay dividend. If the position is good, more people will start showing interest in the shares of the company. This will result in a rise in its share price.

Foreseeing the prospects of a higher dividend, the speculators may start buying the shares in bulk which may result in an escalation in the share price. As the price reaches the top, the speculators may start selling their holding in order to make quick profits. This selling will bring down the price.

6. Appointment / Resignation of directors causes price fluctuation in shares

The resignation of a well-known director of the company may create doubts in the minds of the investors about its financial soundness. This will have an adverse effect on its share price. Similarly, when a popular director of the company, who has a sizable holding, dies, his shares may be disposed off. Such a large scale selling may bring down the company’s share price.

7. Speculators causes share Price fluctuation

During a period of depression, which is characterized by a fall in the price level, the bear speculators may have to make purchases to meet their commitments to sell. This leads to a rise in the price of the security.

The activities of the speculators are also important determinants of security prices. When the bulls start buying in bulk in the expectation of profit from a rise in the price, the price does rise. Likewise, the activities of the bears lead to a fall in the price.

8. Listing in more than one market causes price fluctuation

When the shares of a company are listed with more than one market, a fall in the price in one market, due to certain factors, may result in a fall in the price in other markets as well.

9. Political changes causes share price fluctuation

The stock market is very sensitive to political changes. An outbreak of war will force the share price to fall. The announcement of certain taxes in the budget by the Finance Minister and such other budget proposals may also result in a fall in share prices.

10. Miscellaneous problems causes price fluctuation

Strikes in industries, amalgamations of companies, the personal health of the Finance Minister or the Prime Minister and even weather and climatic conditions affect the prices of shares in the stock market.