Question

1.What drives the value of a stock?

Answer 1

First, we know that stock is the small portion of company’s share capital issued in the market to sell, in exchange company gets the fund from buyers and pays interest on that particular amount.

Following are some factors drives the value of stock:

• Demand and supply is the most important factor that drives the value of any stock. Supply depends on how many stocks company issues in the market and demand depends on the available buyer who want to buy that share. The more the desire or willingness to purchase the stock the more amount they are ready to pay to buy that stock from market, as supply is limited so new people can only buy the share if existing owners are ready to sell their own stock, so if demand is high and owners are not willing to sell, the prices goes up, but after some extent they will start selling to earn profit from high price at that time prices or value of shares starts decreasing.
• Company’s financial health also drives the value of share, if company is financially strong and the earnings are stable or in increasing stage than the value of stock will be high, everyone wants to buy but no one wants to sell the stock, and exactly opposite situation in poor health of company.
• The health of industry is also important, investors thinks that if the industry is growing, companies in that industry will do good, and if industry is not doing well investor can raise question on company’s health too.
• Economy as a whole also affects the stock prices when economy is strong, the overall financial health of business will be good and which is positive for company and if the economy is poor, it will affect negatively to the each business in country.
• Any event that occurs suddenly that also can affect the specific share prices and the whole industry, if any natural calamity happens or any man made activity like terrorist attack, insolvency, big scandals happens in industry than it can affect the value of stock negatively.
• Government’s policy, rules and regulations for business and whole industry are also reason behind value of stock, it should be supportive to industry and that helps to maintain the value of stocks.