Question

What are the various factors that influence the demand for stocks? List them, define them and give examples of each.

Answer 1

The various factors that influence the demand for stocks are:

1. Economic data - Economic data provides information about the state of the economy, economic conditions, market dynamics, central bank policies. If the economy is doing better than expectations, it creates more demand for stocks in anticipation of better earnings.Example when economy is in boom and people have good income, they have more investment opportunities and demand for stock increases. During recession, when people fall short of money, the demand for stocks fall.

2. Interest rates - Interest rate increases lead to decreased demand for stocks as the risk-free rate of return rises. In case of lower interest rates, people prefer to keep less money with banks and invest more in market hence, demand for shares rise.On the other hand, high interest lowers the demand for funds and the demand for shares is lower. Example: When interest rate is high people will earn more interest on deposits and prefer to save in bank rather than investing on stocks which would lead to fall in demand for stocks.

3. Corporate results influence the demand for stocks - Corporations' profits, sales, margins, and outlook have a massive impact on demand for their shares. Example is dividend. Companies pay dividend to stock holders from their profits and when companies make dividend announcements, the share prices of such companies increase. If the dividend rate announced is lower than the investors’ expectations, share prices decline while if they are up to more than expected, share prices increase.

The experienced and credible management with a proven track record contribute to higher share demand as people have trust on the company compared to a company whose management lacks integrity.