The stock price is certainly an important fading element that will be considered when making a decision to buy or sell shares. Because in this stock price, the development of our investment will be assessed as developing or not.
Well, this time we will discuss the rise and fall of stock prices which is quite a mystery. It's no secret that one of the highlights of investing in stocks is the movement of prices up and down, and almost never stops fluctuating.
But what makes stock prices shape? What are the factors that determine the price of one of these securities, especially in the Indonesian capital market? Cus, see the explanation!
How are Stock Prices Formed?
The concept is the same as the formation of the price of goods in the conventional market. Yes, so the stock price also depends on force and demand, or supply and demand. That is, the price will rise when there are more buyers (demand) than sellers (supply).
Conversely, the price will fall when there are more sellers than buyers. The Indonesia Stock Exchange (IDX) from its official website also stated that the demand and supply was indeed the reason for the formation of stock prices.
Of course, there are many other factors that affect both of them, one of which is the performance of the company and the industry the company is in.
Meanwhile, there are also macro factors that affect supply and demand, namely interest rates, inflation, exchange rates and non-economic factors, such as social and political conditions, and other factors.
So it becomes clearer if the analogy is when sellers and buyers meet in the system then the two will form a price board. Once formed, a stock sale and purchase transaction will occur, and a profit can be obtained from the stock, namely capital gain.
Profits Obtained from the Formation of Share Prices
Capital gains are profits obtained from stock trading activities in the secondary market that occur in a short period of time. Investors can buy and sell shares immediately, then the profit is obtained from the difference between the purchase price and the selling price. However, you need to know that stocks also have risks such as capital loss and liquidity risk.
The IDX explained that capital loss can occur when investors sell company shares at a price lower than the purchase price. The risk of liquidation that can occur if the company you buy shares is declared bankrupt or dissolved by the court. However, as long as there is still some remaining from the sale of the company, it can be distributed to shareholders proportionally.
You also need to know, that there are other forms of profit from shares that investors can also get, namely dividends or the distribution of company business profits. Later, shareholders will benefit in the long term, which will be given directly by the company when sharing profits with other shareholders.
What Factors Affect Stock Prices?
Here are some economic and non-economic factors that affect the supply and demand for stocks.
- Company news and performance
- The first non-economic factor can be seen from the company's specific conditions that can affect stock prices
- Issues of income and profit, and forecasts of future earnings
- Announcement of dividend New product introduction or product recall
- Employee layoffs. Anticipated takeovers or junctions
- Change management
- Accounting errors or scandals
Industrial performance
Often times, the stock prices of companies in the same industry will move in tandem with one another. This is because market conditions generally affect firms in an industry in the same way. But sometimes it can also happen, the stock price of a company benefits from bad news that happens to its competitors.
Investor sentiment
Investor sentiment or confidence can cause the market to rise or fall, which can cause stock prices to also rise or fall. The general direction the stock market is taking can affect the value of a stock
- Bull Request – a strong stock market when prices rise and investor confidence grows. It is often associated with an economic recovery or an economic boom, as well as investor optimism.
- Bear Market – a weak market when stock prices fall and investor confidence fades. This often happens when the economy is in recession and unemployment is high, which is accompanied by rising prices.
Economic factors
Interest rate
Banks can raise or lower interest rates to stabilize or stimulate the economy. This is known as monetary policy. This can also affect the stock price.
If a company borrows money to expand and improve its business, the higher interest rate will affect its cost of debt. Of course, this can then reduce the company's profits and dividends that will be paid to shareholders.
As a result, stock prices can be corrected. When interest rates are high, interest-paying investments tend to be more attractive to investors than stocks.
Economic view
If the economy is predicted to grow, share prices can also rise. Investors may buy more shares, because they will see future profits and a higher share price. However, if the economic outlook is uncertain, investors can cut back on buying or start selling.
Inflation
Inflation means higher consumer prices over time. This often slows down sales and reduces profits. Higher prices will also often lead to higher interest rates. For example, banks can raise interest rates to slow inflation. These changes will tend to lower stock prices.
Deflation
Lower prices tend to mean lower profits for companies and a decline in economic activity. Stock prices may drop, and investors may start selling their stocks and shift to fixed-income investments such as bonds. Interest rates can be lowered to encourage people to borrow more. The goal is to increase spending and economic activity.
Economic and political shocks
Changes around the world can affect the economy and stock prices. For example, an increase in energy costs can lead to lower sales, lower profits, and a lower stock price. Acts of terrorism can also lead to a decline in economic activity and a drop in stock prices. So is the pandemic.
Changes in economic policy
If there is a new government in power, then there may be new policies. Sometimes these changes can be seen as good for the business, but sometimes they are not. They can cause changes in inflation and interest rates, which in turn can affect stock prices.
So, do you understand the process of forming stock prices and the factors that influence it? Make sure you delve deeper into the world of stocks before jumping into investing.
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