How Often Do Share Prices Change

Stock prices are determined by the complex interplay of supply and demand in the marketplace. When examining stock price movements, consider a practical scenario: imagine 1,000 buyers wanting to purchase shares at £10, but only 500 sellers willing to sell at that price. After the initial transactions, the remaining buyers might raise their offer to £10.50, attracting new sellers and establishing a new market price. This fundamental principle of price discovery leads us to explore three main categories that influence stock prices: fundamental factors, technical factors, and market sentiment.

Key Takeaways
Understanding stock price movements requires recognizing several core principles. First, while numerous factors influence prices, the ultimate determinant is the immediate balance of supply and demand. Second, fundamental factors, including company earnings and financial performance, provide the foundation for long-term value. Third, technical factors, such as market patterns and trading dynamics, often drive short-term price fluctuations. For example, investors can observe real-time price movements at https://admiralmarkets.com/stocks/iag, which demonstrates how share prices can fluctuate based on market dynamics.

Fundamental Factors
In an efficient market, stock prices primarily reflect fundamental factors through two key components: the earnings base and the valuation multiple. The earnings base represents the company’s current profitability, typically measured by earnings per share (EPS). The valuation multiple, often expressed as the price-to-earnings (P/E) ratio, reflects investors’ expectations about future growth and risk. Together, these metrics create a framework for understanding a stock’s intrinsic value based on both current performance and future potential.

The Earnings Base
When analysing a company’s earnings power, investors should look beyond traditional EPS measurements. Different industries often require specialized metrics to accurately assess performance. For instance, Real Estate Investment Trusts (REITs) commonly use Funds from Operations (FFO), while mature companies might focus on dividends per share. Free cash flow per share has gained prominence as an alternative measure, particularly for businesses with significant non-cash expenses or capital requirements.

The Valuation Multiple
Future expectations play a crucial role in determining stock valuations through the multiple applied to earnings. This multiple reflects two primary factors: expected growth in the earnings base and the discount rate used for future earnings. Higher growth potential typically commands a higher multiple, while increased risk or inflation rates lead to lower multiples. The key elements influencing valuation include earnings quality, growth prospects, perceived risk, and prevailing economic conditions.

Technical Factors
External conditions significantly impact stock supply and demand beyond fundamental valuations. These technical factors often indirectly affect fundamentals, creating a complex web of influences. For example, broader economic growth can boost company earnings, while market conditions can affect investor confidence and trading patterns.

Inflation
Inflation impacts stock prices through multiple channels. From a technical perspective, low inflation historically correlates with higher valuation multiples, while high inflation typically leads to lower multiples. Conversely, deflation can harm stocks by reducing companies’ pricing power and potentially triggering broader economic concerns.

Economic Strength of Market and Peers
Individual stocks rarely move in isolation. Research suggests that approximately 90% of a stock’s movement can be attributed to overall market and sector trends rather than company-specific factors. This “guilt by association” effect means that negative news about one company can impact entire sectors through changing investor sentiment.

Substitutes
Global financial markets offer various investment alternatives competing for capital. These include corporate and government bonds, commodities, real estate, and foreign equities. While the relationship between these alternatives and stock demand remains complex, understanding these dynamics helps explain capital flows and price movements.

Incidental Transactions
Not all stock transactions reflect fundamental investment decisions. Executive insider transactions, institutional hedging activities, and other non-fundamental trades can significantly impact prices through supply and demand changes, even when they don’t represent true value assessments.

Demographics
Investor demographics significantly influence market demand patterns. Middle-aged investors, typically in their peak earning years, tend to invest more actively in stocks. Conversely, older investors often reduce their stock holdings to meet retirement needs, creating predictable demographic-driven market pressures.

Trends
Stock prices often follow short-term trends through momentum or mean reversion. While momentum can drive prices higher as success breeds further buying, mean reversion suggests prices eventually return to their average levels. However, these patterns become apparent mainly in hindsight, limiting their predictive value.

Liquidity
Trading volume and market interest significantly affect price movements. Highly liquid stocks like major market leaders respond quickly to news, while smaller companies may suffer from permanent “liquidity discounts” due to lower trading activity. Corporate communications and investor awareness play crucial roles in maintaining market liquidity.

News
Global interconnectedness means news events can rapidly impact stock prices across markets. Corporate earnings releases, political developments, economic data, and unexpected events all influence investor sentiment. While strong earnings typically drive prices higher, some high-growth companies maintain elevated valuations despite current losses, reflecting expectations of future profitability.

Market Sentiment
Psychological factors often drive market behaviour in ways that challenge traditional financial theories. Behavioural finance, legitimized by Daniel Kahneman’s Nobel Prize, explores how investor psychology affects market efficiency. Common behavioural patterns include overemphasis on recent information, asymmetric responses to gains versus losses, and persistent cognitive biases.

The Bottom Line
Different investors prioritize various factors when making investment decisions. While short-term traders often focus on technical factors, long-term investors typically emphasize fundamentals. Many argue that technical factors and sentiment dominate short-term movements, but fundamentals ultimately determine long-term value. The emerging field of behavioral finance continues to provide new insights into market dynamics.