The basic principle
If the company is a Public Limited Company (plc) listed on the stock market then it’s share prices can go up or down depending on how well the company does or how strong the stock market is as a whole at any given time. Check out our simple explanation of what a share is.
How company performance influences the share price
So, how do we understand how a company is actually doing? Well, companies listed on the stock market will publish their financial results twice a year. In addition, interim trading updates are provided twice a year. This tells us things like how much revenue and profit they have generated. A company may also make ad-hoc announcements and updates throughout the year.
If a company is putting out positive announcements, this signals to the market that the company is performing well, making it more attractive to investors. Positive announcements could include financial results that demonstrate growing sales and profit. It could also be announcements of new products released or contracts won
The effect of this is that is raises the demand level for the shares. So, as more people want to buy the shares it pushes the price up. This helps progressively reduce the demand. Imagine, during a snowstorm a supermarket has ten loafs of bread to sell but one thousand people want to buy one. Do you think they could charge more? If they did you would expect at least ten people to buy. However, you would also expect demand to progressively reduce as people judge the price to be too high for them.
It is important to note, that this can work both ways as well. If a company is sending negative signals it is likely to have the opposite effect and reduce demand.
A share price will usually not just be a reflection of past and current company performance. People may buy a share because of how they predict the company will perform in the future, meaning this anticipated future performance also gets built into the price of the share.
How external factors influence share prices
Share prices can also be affected by the wider economic climate. If the economy is going through difficulty, for example the country (or countries) the company operates in are experiencing weak economic conditions (this could include a variety of factors from high unemployment to weak consumer demand) investors may feel less confident about the profits the company is likely to make. This has the effect of pushing down demand for the shares and in-turn pushing down the price.
On the other hand, if the economy is strong, it usually serves an indication to investors that the chances of the company doing well are higher. This increase in confidence will often encourage investors to buy the shares, therefore raising demand and pushing up the price.
If you are an investor it is important not to get too carried away. Always ensure you research and understand the company itself and the strengths and weaknesses of the underlying business.
Keeping it simple
When a company is doing well and/or expected to do well in the future the demand for the share will usually rise. This pushes the price up. Conversely, when a company is not doing so well and/or expected not to do well in the future the demand for the share will usually fall. This has the effect of pulling the price down. The share price movements are managed through the stock exchange. The stock exchange in the UK is the London Stock Exchange.
If you’re keen to learn more make sure you check out the rest of our website or grab a copy of our free Beginner’s Guide to Investing in the Stock Market.
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