The stock market forums across the globe tend to experience severe volatility that often results in huge gains or losses for the investors. This tendency of the stock market is quite often reported in news and many of you might contemplate over the reasons of fluctuation within the financial market.
The Invisible Hand
The forces of demand and supply are known to create havoc within markets and the rapidly changing demand and supply in the stock market means that prices change on a continuous basis. The demand of stock arises from demand by investors that seek to buy shares whereas the supply arises from investors that wish to dispose off their investment. The demand supply equilibrium results in the determination of market price whereby shifts in demand and supply curve results in changes in the respective market price. The basic question that arises is why do the forces of demand and supply change and what is the basis of the investors decision making strategy?
Factors Influencing the Invisible Hand
The forces of demand and supply within stock market forums are impacted by various factors such as speculation, retention policy and price/earnings ratio.
* Price Earnings ratio
The price earnings ratio measures the confidence of the investors in a given stock. The price earnings ratio represents the market share price as a percentage of Earnings per Share. EPS represents the earnings that are attributable to shareholders of the organization. Declining EPS is likely to send a signaling effect to the stock market that the company is unable to perform well. This results in a decline in market price per share that ultimately lowers the P/E ratio. Declining P/E ratio over the period of time is likely to result in investors to sell the stock and increase the supply in the market thereby causing prices to decrease further. Conversely, rising P/E ratio is likely to boost up investor confidence and would ultimately result in a further increase in prices.
* Economic Conditions
The general economic conditions have a significant impact on the stock market forums. Economic conditions might depict low levels of growth and instability and this could ultimately result in prices to go down as investors might predict a decrease in profitability of the companies in the foreseeable future. Conversely, investors might predict stable economic conditions and this could boost the stock market as investors might predict rising profitability of the company and thus higher earnings per share of shareholders.
* Dividend and Bonus Shares
Investors usually invest in Stocks in order to realize gains in form of dividends which are paid on an annual or semiannual basis by the company. A company might also give bonus shares to its shareholders. Such activities send a signal to the stock market and prices of stock usually rise after declaration of dividend either in form of cash or hot penny stocks.
Investors tend to predict the profitability of the company and this significantly affects the share price of the Penny Stocks company. If investors speculate high levels of profitability within specific companies they are likely to enjoy higher market capitalization than other companies.