Price of the stock moves up and down that we all know. The general and basic reason we all know which affect the price movement of the stock is the supply and demand rule. But how this supply or demand is decided? What are the reasons that decide whether we have to buy or sell the stock? If you are trading or investing in stocks, you must know these reasons which affect the stock price movement.
It is possible that some of the reasons you know already, some of them you have it in your mind while taking your position. Let’s discuss one by one these reasons which are very important for you as a trader or investor. These reasons are also applicable even if you are indirectly investing in the stock market. Here indirect investing in the stock market means investing through mutual funds.
Financial results of the company
This is the most important factor affecting the stock price movement. Whenever there is a quarterly result awaited, we can see a price movement of the stock before few days of the result. Generally, there is a linear correlation between financial result and stock price movement. If the stock price is moving up before the result, it means that the financial result will be good for that quarter and vice versa. Here the market is expecting a good financial result of the company and hence the price of the stock is moving up.
Majority of the retail investors are making a big mistake here by entering the stock on the result day or after the announcement of the result. It’s too late to enter the stock on the result day or after its announced. If you want to invest in a stock based on the upcoming result then don’t wait till the result is announced. Catch the stock at least 15-20 days before the result date for that stock. Intelligent investors enter the stock far ahead of the result announcement and book their profit on the result day. Majority of the retail investors are unaware of this fact and they become the victim by entering the stock after the result is announced.
Who is buying the stock?
Keep an eagle eye on the buy and sell movements of the FII, DII, Mutual Fund, Ace Investors. Check for their buy or sell transaction of substantial volume. This is the clear-cut indication of the stock price movement based on the type of the transaction by these entities. You might have heard some names of the ace investors like Porinju, Dolly Khanna, Vijay Kediya etc. Retail investors who don’t have much of a knowledge about the market are blindly following these people. These investors are buying a stock in a big quantity and they become a news in the market. Thousands of people are following them and buy the same stock hoping for a big profit from their trade.
Company merger and acquisition
There will be a big movement in the stock price whenever there is a news about a merger or acquisition of the company. The price movement will be decided based on the merger or acquisition deal. If it’s favorable for the company the market will take it as positive indicator and price of the stock will move up. Check and assess the impact of the merger or acquisition on the company and based on that you can take your decision about the stock.
Another factor the affect the price movement of the stock is the buyback. Buyback means accumulate the stocks by the company/promoters from the market. The main reason for the buyback is to reduce the outstanding shares in the market. The price of the buyback is usually higher than the current market price to attract maximum shareholders. This way the company gets its stake back from the market. This also means that the profit will be distributed among less number of shareholders. Means the EPS will increase and eventually the stock price. So it is good NOT to giveaway your shares in a buyback. This is my personal view and may differ from person to person.
Inclusion or exclusion from the Index
When the stock is added to the index, it is a positive news. More and more people are buying the stock which will increase the demand for that stock and price will move up. Same way when the stock is excluded from the index, the market sentiment for that share is negative and the price will move down.
Change in company’s management
Management of the company are the key people who drive the company. These are the people who create company’s vision mission and roadmap. There are many reasons why these people join or leave the company. Their entry or exit will have a big impact on the stock price. For example, The stock price of Infosys was going down and down due to weak management. Then there was a return of its ex-promoter Mr. Narayan Murthy. His name is enough to lift the share price of the company. There was a huge upward movement in the stock price after Mr. Murthy has joined back. These type of news can have a deep impact on the stock price.
Any political changes can have good or bad impact on the economy. It also affects the particular stock price if the changes impact that stock. Political stability plays a vital role in deciding stock price movement. If the government is stable than the market will also react positively. The RBI policy, budget announcement, foreign policy, import-export policy, these all policy decisions by governing party can have a good or bad impact on the stock price.
The factors mentioned above are the deciding factors for price movement. These all factors are short-term factors which affect the price of the stock for the short-term. For long-term, these factors are not so important as the impact of these factors will get diluted over the period of time.