Why do stocks go up and down?
The price of stocks on the stock exchange is constantly changing - some securities go up in price, the rate of others go down. At the same time, the stock price can rise during a crisis and fall during a calm and quiet period. Why does this happen?
Factors affecting the share price
Stock prices are affected by long-term and short-term factors. It is quite easy to understand them if we use an analogy. Let's compare a stock to an airplane, for example.
- The aircraft's course is determined by its engine power, fuel tank capacity, and the pilot's actions. This is long-term factorswhich will tell us about the capabilities of the aircraft.
- As an airplane flies, its course is affected by air temperature, wind speed and direction, cloud cover, and precipitation. short-term factorswhich affect the current course of the aircraft.
It's the same with stocks:
- Long-term factors influence the company's business prospects for a period of one year or more. Long-term factors are primarily of interest to investors.
- Short-term factors are what is happening to a company's business right now. Such factors are basic for traders speculating on stocks.
Long-term factors that make stocks go up and down
- Fundamental valuation of the stock
Stock exchange quotations often differ from their potential price. Investors evaluate the value of a company's business based on fundamentals and buy those securities whose market value is lower than the estimated value. Unfortunately, there is no clear formula for estimating the fundamental value of a stock, so investors use one of the company's available fundamentals to understand.
For example, to evaluate Sberbank shares applies the book value indicator - an indicator for long-term investors that shows the value of all assets on a company's balance sheet. Sberbank's capitalization fell below book value in 2008 and 2014, which served as a signal for long-term investors to buy Sberbank stock.
- Investor expectations regarding the company's performance
It is purely psychological. If investors are expecting good results from a company, its shares will be in demand and rise in price. If investors are skeptical, the share price will drop even before the results are available.
For example, in 2017, Polyus began developing the new Natalka deposit and announced plans to launch the Sukhoi Log deposit, which is the largest in the world. Naturally, this created positive expectations among investors, and in two years Polyus shares rose from 3,900 to 5,500 rubles.
- Industry Perspectives
It's quite simple here. If an industry is successful, the shares of companies in that industry will rise in value. For example, the explosive growth of the Internet advertising sector in Russia in 2012-2014 resulted in Yandex stock price on the U.S. exchange rose from $19.5 to $43.
- Quotes on commodity and currency markets
These factors affect the financial results of the company, and accordingly, the value of the stock depends on them. What cheaper ruble and more expensive oil, the higher the financial performance of companies in the oil and gas sector. For example, in 2016 the growth of Brent oil prices from $28 to $57 a barrel, and Rosneft shares rose in price from 230 to 409 rubles.
Expensive oil is not suitable for everyone. Rising oil prices lead to higher fuel prices, which, in turn, negatively affects the share price of transport companies, such as Aeroflot.
- Actions of the company's top management
As you name the boat, so it will sail, that is, what actions will be taken by the company's management, and such results will be obtained in the end.
For example, the management of Tatneft has adopted a new strategy aimed at capitalization growth, increasing production volumes and increasing dividends. At the same time, there was a financial incentive for the company's management. This led to the strategy being implemented in just two years instead of the nine years planned, and Tatneft shares During 2018, the price went up by 64%.
Short-term factors affecting the share price
- Events related to company activities
Basically, it could be anything: a change of management, publication of financial reports, an accident, a change in dividend policy. The share price will react to any such event, but its impact will not last long.
For example, in the summer of 2018 Gazprom shares began to rise on rumors that at the Investor Day the company's management would announce a decision to increase the size of the dividend. Indeed, the announcement was made, and the share price rose further. However, about six months later, Gazprom's share price returned to its previous levels.
- External Background
As a rule, these are factors related to geopolitics.
You don't have to go far to find examples. The U.S. sanctions against Oleg Deripaska also affected a number of companies. Despite the fact that the sanctions were just announced and haven't had time to have any impact on the company's business, Rusal's shares dropped from 34.3 rubles to 22.6 rubles in just two days.
A little more than two weeks after the sanctions were imposed, a compromise was reached between the U.S. Treasury and Deripaska. As a result, the quotes Rusal shares added 17%.
- Amounts of dividend payments
If investors have an expectation of large dividend payments, the stock will be in high demand. If real dividends are lower than expected, the stock will sell off and its price will fall quickly.
In 2016, there was an announcement of Gazprom's intentions to reduce the amount of dividend payments for 2015 - as a result, Gazprom's shares fell in price by 6%. In 2017, a decision was made to allocate 20% of IFRS net profit to dividend payments. Shareholders' expectations were not met - Gazprom stock price fell another 2%.
- Redemption of shares by the company
As a rule, if a company starts to buy back its shares on the market, it is regarded as a signal to investors that they undervalue the company's shares. The demand for them increases and the stock goes up in price. However, it is not always so straightforward and a lot depends on the environment around the company and its reputation.
Company buyout Magnet of its shares in 2018 initially led to an increase in their value. Large investors took advantage of this and started to sell their shares, fixing profits and thus interrupting the growth of their price.
- Global situation
Stocks are part of the global financial system, so much depends on global sentiment and world events.
For example, the COVID-19 coronavirus pandemic has made very tough adjustments to the stock performance of almost all industries and all stock exchanges. Shares of air carriers, such as AeroflotThe gold miners' shares went into deep drawdowns, and the gold miners' shares Pole и Polymetal, are in demand as a protective asset.
Results
For someone unfamiliar with the financial markets and exchanges, stock movements are the dark woods. In fact, as you can see, stock prices are determined by a set of factors that are nothing supernatural. Understanding why stocks go down and why they go up is one more step to becoming a successful investor.