Factors that can affect stock prices

Investors buy stockStock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions.+ read full definition for the potential to gain a return on their investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition. Companies issue stock (also called shares) to grow their business. There are many stock markets across the globe. There are also many different factors that can affect stock prices.

Understanding how the stock marketStock market The collection of markets and exchanges where stocks, bonds and other securities are issued or traded.+ read full definition works can help you with your investing strategy.

On this page we answer:

• What is the stock market?
• Where are stocks traded?
• How are stock prices set on a stock exchange?
• What is an initial public offering (IPO)?
• What factors can affect stock prices?
• Summary

What is the stock market?

The stock market brings together people who want to buy stock and people who want to sell stock. When you buy stock (or equityEquity Two meanings: 1. The part of investment you have paid for in cash. Example: you may have equity in a home or a business. 2. Investments in the stock market. Example: equity mutual funds.+ read full definition) in a company, you own a shareShare A piece of ownership in a company. A share does not give you direct control over the company’s daily operations. But it does let you get a share of profits if the company pays dividends.+ read full definition of the company and become a part owner. That’s why stocks are also called shares.

There are two types of stock markets:

• Primary marketPrimary market The market where securities are offered to investors for the first time. The money from the sale of the securities goes directly to the company. For example, buying a company’s stocks from a company it hires to sell them (the underwriter).+ read full definition –where the first sale (or offer) of stock by a private company to the public happens. This is also referred to as an initial public offering.
• Secondary marketSecondary market The market where securities are resold by other investors, not the company that issued them. The money from trades goes to the selling dealers or investors, rather than directly to the company that issued the shares (which is the primary market).+ read full definition –where subsequent buying or selling – often called trading – of a company’s stock takes place. 

Stocks may also be referred to as equitiesEquities Another word for investments in the stock market.+ read full definition. Equities are one of the three main assetAsset Something of value that a company or an individual owns or controls. Examples: buildings, equipment, property, a car, investments, or cash. Can also include patents, trademarks and other forms of intellectual property.+ read full definition classes, or types of investments: equities (stocks), fixed incomeFixed income An investment that pays regular income to you. Examples: Guaranteed Investment Certificates, Canada Savings Bonds and types of other bonds.+ read full definition investments (such as bonds), and cash or cash equivalents (such as guaranteed investment certificates). Learn more about different types of investments.

Where are stocks traded?

What we call the stock market is actually many different markets around the world that tradeTrade The process where one person or party buys an investment from another.+ read full definition securities like stocks and bonds. This trading typically happens on stock exchanges but can happen on other kinds of marketplaces.

1. Stock exchanges

A stock exchangeStock exchange A market in which securities are bought and sold.+ read full definition is a market where an investor can trade securities in a publicly visible manner. Trading on stock exchanges is governed by rules that apply to all users of that exchange. All stock trades are now done electronically.

If a company is listed on a recognized stock exchange, it must:

• Distribute a certain number of shares.
• File appropriate information about its management team.
• Provide specific financial information.

Some of the most widely known stock exchanges in Canada focus on certain kinds of investments. For example, the Toronto Stock Exchange (TSX) serves the senior equity markets and lists well-established companies.

2. Other marketplaces

Stocks are also traded through other marketplaces including:

• Alternative trading systems (ATSs)– automated trading systems that bring together dealers and institutional investors who trade large quantities of stocks.
• Over-the-counter (OTC) marketsOver-the-counter (OTC) markets Dealer networks where “unlisted” stocks are traded.+ read full definition –dealer networks where “unlisted” stocks are traded.

How are stock prices set on a stock exchange?

The buyer and seller must agree on a price before a stock can be bought or sold. Here’s how it works:

• People compete to buy the stock if they believe that its price will rise, and they will make a profit.
• Sellers compete to find buyers for their stock at the highest possible price.
• There are usually several investors trying to buy and sell stock in the same company at the same time. It’s like a big, computerized auction.
• Once a stock is bought or sold, the price is posted so that everyone knows the latest price.

For a stock exchange to be successful, it must be perceived as fair and equitable, where information is public and visible.

The stock market is influenced by many factors and is tracked in different ways. Learn more about how the stock market works.

What is an initial public offering (IPO)?

The primary market is made of initial public offering (IPOs). An IPO is the first sale of stock by a private company to the public. It’s often called going public.

There are five main reasons why a company may have an IPO:

1. Raise capital –The company can sell shares to raise money to expand and improve its business.
2. Get financing –It may be able to borrow more easily and on better terms.
3. Attract good people –It will be more likely to offer stock purchase plans or stock optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ read full definition to keep its top employees or attract new ones.
4. Create a stronger brand –Going public often creates more media attention so people get to know a company’s brand better.
5. Attract other companies –Other companies may evaluate it for potential mergers and acquisitions.

A public company is more closely watched by securities regulators. It also must meet tougher reporting rules.

What should you know before investing in an IPO?

There are advantages and disadvantages to investing in an IPO.

• The main advantage is that, if the company continues to grow, the stock you purchased during the IPO has the potential to yieldYield Your yearly return on an investment. It’s often stated as a percentage, such as 5%. With stocks, yield can be your yearly income from dividends. With bonds, it’s the interest you get.+ read full definition dividends.
• The main disadvantage is that it is difficult to predict if or when the value of the stock will increase. It’s also possible that the stock value will decrease after the IPO or take a long time to increase at all.

Before you investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition in an IPO, it’s a good idea to consider these questions:

• What are the risks? –IPOs are usually riskier than a stock that’s been on the stock market for a while. Before you decide, read the prospectusProspectus A legal document that sets out the full, true and plain facts you need to know about a security. Contains information about the company or mutual fund selling the security, its management, products or services, plans and business risks.+ read full definition from the company issuing the IPO. The prospectus describes the business plan and notes important risk factors. Check whether the company is making money or when it expects to become profitable.

• Are there any fees? –In most cases, you won’t pay any commission to buy an IPO. That’s because the company issuing the IPO hires underwriters to price and market the new stock. Underwriters get large fees for their services. Their fees are built into the initial offering price of the stock.

No one can predict how the price of an IPO will change once it goes on sale. That makes it a risky investment.

How to buy and sell stocks

What factors can affect stock prices?

When you buy stock, you’ve purchased an investment that could go up or down in value. It can be difficult to predict whether it will go up or down, by how much, and when. It can help to learn more about the factors that can affect stock prices. Specific news about a company’s earningsEarnings For companies, it’s the money they make and share with their shareholders. For investors, it’s the money they make from their investments.+ read full definition can influence stock prices. And so can a change in how investors feel about the stock market in general.

If you are a DIY investor, learning more about these factors can help you develop your investment strategy. Along with understanding your own investing goals, time horizonTime horizon The length of time that you plan to hold an investment before you sell it. This may be a brief period of time or span as long as decades, depending on your financial goals.+ read full definition, and tolerance for risk. If you work with an advisor, you may choose your advisor based on their expertise in these areas.

There are four main factors that can affect stock prices:

1. Company news and performance
2. Industry performance
3. Investor sentiment
4. Economic factors

1.       Company news and performance

The way a company is performing can indicate whether it is growing or declining. There are some company-specific factors that can affect the share price including:

• news releases on earnings and profitsProfits A financial gain for a person or company. Equals the money left over after you subtract your costs from the money you made.+ read full definition, and future estimated earnings
• announcement of dividends
• introduction of a new product or a product recall
• securing a large, new contractContract A binding written or verbal agreement that can be enforced by law.+ read full definition
• employee layoffs
• anticipated takeover or merger
• a change of management
• accounting errors or scandals

2.       Industry performance

Often, the stock price of companies in the same industry will move in tandem with each other. This is because market conditions generally affect the companies in the same industry the same way. For example, if a product made by one company is reported to be unsafe, then this may affect other companies that produce the same product.

But sometimes, the stock price of a company will benefitBenefit Money, goods, or services that you get from your workplace or from a government program such as the Canada Pension Plan.+ read full definition from a piece of bad news for its competitor if they are competing for the same market. For example, if a company making a popular product has to halt operations, then other companies that make a similar product would have more demand.

3.       Investor sentiment

Investor sentiment or confidence can cause the market to go up or down. This can cause stock prices to rise or fall. The general direction that the stock market takes can affect the value of a stock. There are two types of broad descriptions for the market:

1. Bull marketBull market A strong market where stock prices rise and investor confidence grows. Often tied to economic recovery or an economic boom, as well as investor optimism.+ read full definition –a strong stock market where stock prices are rising, and investor confidence is growing. It’s often tied to economic recovery or an economic boom, as well as investor optimism.
2. Bear marketBear market A weak market where stock prices fall and investor confidence fades. Often happens when an economy is in recession and unemployment is high, with rising prices.+ read full definition– a weak market where stock prices are falling, and investor confidence is fading. It often happens when an economy is in recession and unemployment is high, with rising prices.

4.       Economic factors

Several economic factors can influence the value of an individual stock or the stock market in general, including:

Interest rates

The Bank of Canada can raise or lower interest rates to stabilize or stimulate the Canadian economy. If a company borrows money to expand and improve its business, higher interest rates will affect the cost of its debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition. This can reduce company profits as well as the dividends it pays shareholders. As a result, its share price may drop. And, in times of higher interest rates, investments that pay interest tend to be more attractive to investors than stocks.

Economic outlook

If it looks like the economy is going to expand, stock prices may rise. Investors may buy more stocks thinking they will see future profits and higher stock prices. If the economic outlook is uncertain, investors may reduce their buying or start selling.

InflationInflation A rise in the cost of goods and services over a set period of time. This means a dollar can buy fewer goods over time. In most cases, inflation is measured by the Consumer Price Index.+ read full definition

Inflation means higher consumer prices. This often slows sales and reduces profits. Higher prices will also often lead to higher interest rates. For example, the Bank of Canada may raise interest rates to slow down inflation. These changes will tend to bring down stock prices. Commodities, however, may do better with inflation, so their prices may rise.

DeflationDeflation A drop in the cost of goods and services over time. Often happens when the supply of money or credit shrinks, or when consumers or government cut spending. This means the same number of dollars will buy more.+ read full definition

Falling prices tend to mean lower profits for companies and decreased economic activity. Stock prices may go down, and investors may start selling their shares and move to fixed-income investments like bonds. Interest rates may be lowered to encourage people to borrow more. The goal is increased spending and economic activity. The Great Depression (1929-1939) was one of the worst periods of deflation ever.

Economic and political shocks

Changes around the world can affect both the economy and stock prices. For example, a rise in energy costs can lead to lower sales, lower profits and lower stock prices. An act of terrorism can also lead to a downturn in economic activity and a fall in stock prices.

Changes in economic policy

If a new government comes into power, it may decide to make new policies. Sometimes these changes can be seen as good for business, and sometimes not. They may lead to changes in inflation and interest rates, which in turn may affect stock prices.

The value of the Canadian dollar

Many Canadian companies sell products to buyers in other countries. If the Canadian dollar rises, their customers will have to spend more to buy Canadian goods. This can drive down sales, which in turn can lead to lower stock prices. When the price of the Canadian dollar falls, it makes it cheaper for others to buy our products. This can make stock prices rise.

Summary

The stock market brings together investors and companies — people who want to buy stock and people who want to sell stock.

• Stocks, bonds, and other securities are traded on the stock market.
• The primary stock market is composed of initial public offerings or IPOs — where companies ‘go public’ for the first time.
• The secondary stock market is where investors buy and sell stock from companies which have already gone public. This is often called trading.

It is hard to know whether the price of a stock will go up or down. Many different forces can affect stock prices, including company news and performance, industry performance, investor sentiment, and economic factors.