What drives stock prices

By iTrust Financial Advisors (www.iTrust.in)

When stock prices go up and down, as investors we seek answers. However, it is challenging to make observations, with surgical accuracy, on what drives price movements.

Often even professionals are at a loss to explain what moves stock prices. So, as amateurs what can one do to understand why stock prices change?

Here are four drivers of stock prices that you might want to keep in mind:

1. Company specific issues: Stocks represent ownership of a business. The operations, growth and profitability (earnings) of a business fluctuate, based on management decisions, competitiveness of the business and financial strength of the company, i.e., the fundamentals of the business.

Often it could be a company specific piece of news that drives the stock prices. For instance, when Bharti Airtel announced plans to merge with MTN its stock dropped. Similarly, when the deal fell through, its stock rose.

2. Industry specific issues: The performance of a business is sensitive to the industry within which it operates. The industry structure, profitability, competition and regulations all affect stock prices of the companies operating in that industry.