What Causes Stock Prices to Change?

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Presentation transcript:

What Causes Stock Prices to Change?

A stock’s price is an indication of what investors believe a company is worth. The price of a stock not only reflects a company’s current value – it also reflects the investor’s expectations of future growth and earnings.

Factors Contributing to Changes ONE FACTOR: Market forces; supply and demand If more people want to buy a stock (demand) than sell it (supply), then the price goes up. If more people want to sell a stock (supply) than buy it (demand), supply exceeds demand and the price falls.

Factors Contributing to Changes ANOTHER FACTOR News events and Public Opinion play a role in creating rises and dips in stock prices. Reports internal corporate activity Industry trends National/International events (political, social and scientific news) Public interpret the reports as “good” or “bad” news and determine whether a company is a good investment or not.

Factors Contributing to Changes THIRD FACTOR These help investors place a value on a stock. P/E Ratios Projected Earnings Public companies must report their earnings four times a year (once each quarter… called quarterly earnings). Wall Street carefully watches earnings results. Analysts base their opinions about future value of a company on its earnings projections. If a company’s results are better than analysts expected, the stock price rises. If a company’s results are worse than expected the stock price falls.

Factors Contributing to Changes FOURTH FACTOR Investors have developed literally hundreds of variables. Ratios and indicators to predict stock price changes. Each approach involves following various market indicators to decide whether to buy, sell, or hold.

Vocabulary Earnings: Whatever profits or net income remains after subtracting the company’s expenses from its revenue (also called a company’s profit). Market Capitalization: A measure of the value of a company, calculated by multiplying the number of outstanding shares by the current price per share. For example, a company with 100 million shares of stock outstanding and a current market value of $25 a share has a market capitalization of $2.5 billion. P/E Ratio: A company’s closing price divided by its latest annual earnings per share. The Price/Earnings is the relationship between a company’s earnings and its share price. It is calculated by dividing the current price per share by the earnings per share.

Activity 2: Influences on the Market Complete, you can discuss in your SMG but each student needs to turn in their own assignment.