This article throws light upon the seven main factors influencing prices on stock exchanges. The factors are: 1. Financial Position of the Company 2. Demand and Supply Position 3. Role of Financial Institutions 4. Lending Rates 5. Trade Cycles 6. Speculation Activities 7. Government Control.
Prices on Stock Exchange: Factor # 1. Financial Position of the Company:
The financial position of a company directly influences the prices of its shares. When a company shows good results by increasing its sales and profits then its shares will command a better price in the market. The rate of dividend declared by a company also influences the prices of shares.
A higher dividend paying company will attract more investors. If a company fails to pay dividend then its shareholders will start selling their holdings and the prices of shares will go down.
Prices on Stock Exchange: Factor # 2. Demand and Supply Position:
Like any other commodity the prices of shares are also influenced by the demand and supply position in the market. The shares in more demand will command a higher price. If the supply of shares is more then their prices will go down.
Prices on Stock Exchange: Factor # 3. Role of Financial Institutions:
The financial institutions are playing an important role in influencing the prices of shares. The institutions like L.I.C., Unit Trust in India, Industrial Finance Corporation, Industrial Credit and Investment Corporation etc. purchase shares of good companies in bulk.
This not only gives a good name to the company (financial institutions showing interest in those companies). But also reduces the supply of shares. Such purchases increase the prices of shares. On the reverse when institutions start selling their holdings, then prices of such shares decline with the increase in supply.
Prices on Stock Exchange: Factor # 4.Lending Rates:
Lending rate influences the supply of money which ultimately affects prices of shares. Reserve Bank of India fixes the bank rate for re-discounting facilities to commercial banks. The bank rate governs the rate of interest charged by commercial banks.
The low lending rates of banks will result in more supply of money and it will increase their prices. On the other hand if money supply is low then prices of shares will go down.
Prices on Stock Exchange: Factor # 5.Trade Cycles:
The stage of trade cycles at a particular period also influences share prices. In the period of boom the prices of shares go up because of overall prosperity. The situation of depression brings stagnation in growth and prices of shares go down.
Prices on Stock Exchange: Factor # 6.Speculation Activities:
The speculation activities of operators at a stock exchange influence prices of shares. The speculators may create artificial scarcity of some shares by purchasing available shares. Once they control the supply of a particular share then they dictate its prices. The operations of bulls, bears and stags directly influence the prices of shares on a stock exchange.
Prices on Stock Exchange: Factor # 7.Government Control:
The policies of the government also influence the prices of shares. When the government gives encouragement and concessions to the expansion and diversification of existing units and setting up of new unit then money market will grow. Any government policy putting restrictions on industrial activity will depress share prices.