Understanding forces that cause stock prices to change
There are a myriad of factors that determine the price of stock on a stock exchange. It is important for investors to understand how the price of a stock is arrived at so they can make informed decisions on their investment portfolios. A number of factors determine the constantly changing price of a security.
The Initial Public Offering price per share and the actual mechanics of what happens may be considered complicated, but the basic idea is simple economics: the price is set as the number which balances supply and demand. Specialists such as financial analysts, fund managers and securities dealers carry out calculations and valuations to determine the initial or opening price of a share when it gets listed on a stock exchange.
The secondary market of an exchange functions like an auction meaning buyers and sellers of securities are lining up on either side for a potential trade, one party willing to buy and the other willing to sell its ownership. When the two agree on a price, a trade is matched and that becomes the new market quotation. Because the stock market functions like an auction, when there are more buyers than there are sellers, the price has to adapt or no trades are made. This tends to drive the price upwards, increasing the market quotation at which investors can sell their shares, enticing investors who had previously not been interested in selling to sell. On the other hand, when sellers outnumber buyers, there is a rush to dump stock and whoever is willing to take the lowest bid sets the price resulting in a race-to-the-bottom.
Stock Exchanges that operate sophisticated systems track security prices in real time and every time there is a trade the volume-weighted-price of that stock is re-calculated. This recalculation also gives a revised market capitalisation of that particular stock as well as that of the entire market.
There are other events that also affect securities prices. Some of these events include but are not limited to performance of the industry in which the company operates in. Any positive sentiments within a particular industry tend to push demand for stocks in companies that operate in that industry and vice-versa.
Securities prices are also influenced by the general economic performance at any given time. Stock markets are usually a good indicator of the state of the economy. A well performing economy reflects in higher and more sustainable activity by long term investors on the local bourse. Major political, economic and social events that occur in the country can indirectly affect a company listed on an exchange. Another factor is the market itself. While a stock may rise and fall on its own merits, it may also benefit just by being in a market that is on the rise, called a ‘bull market’ or a market that is on a retreat, called a ‘bear market’.
Certain market conditions like bear markets which require investors to take quick action. This is made simple by the C-TRADE platform which enables any Zimbabwean in and out of the country to buy shares anytime anywhere without visiting a stockbroker. C- TRADE has investor interface tools such as a Web Portal which is only accessible to retail investors. The Web Portal offers an advanced interface which allows investors to participate on the exchange in real-time through personal computers and gives them rich stock market information. There is also an app-based solution for retail investors on smart phones. The USSD-based solution is targeted at non-smart phone users and integrates mobile money services. To find out more about C-TRADE visit www.ctrade.co.zw.
The C-TRADE platform is convenient in that it allows investors to choose from two marketplaces; the Zimbabwe Stock Exchange and the Financial Securities Exchange with each market catering to the varying preferences of investors, whether immediacy of execution, or best price, or least market impact, or different type of trading system altogether.