What investors need to understand about factors affecting stock prices

Why Should You Care About Factors Affecting Stock Prices

When entering the world of stock investment, the first question many people ask is: how do I know which stock codes are worth buying and which should be avoided? The answer lies in understanding the factors influencing stock prices. These factors not only help you analyze whether the current price is appropriate but also allow you to predict short-term and long-term trends.

Mastering these influencing factors is key to making smart buy and sell decisions, thereby optimizing profits and minimizing risks. This is especially important for new investors in this field, who are easily influenced by information and crowd psychology.

Differentiating Stock Price and the True Value of a Business

First, it’s important to clarify the concepts. Stock price is the amount you pay to own a share on the market at a specific point in time. This is the market price — a figure determined by supply and demand forces between buyers and sellers every minute, every second.

The true value of a business is a completely different concept. It reflects the financial health, profitability potential, and long-term growth prospects of the company. The true value is determined through financial indicators such as P/E, P/B, net profit, revenue, and market competitiveness.

Short-term investors usually focus only on stock price fluctuations to make quick profits. However, long-term investors need to grasp both aspects to develop sustainable strategies.

Macroeconomic Factors Significantly Impact Stock Prices

National and Global Economic Conditions

The strength of the economy directly impacts stock prices. When the economy is booming, company revenues increase, enabling them to pay higher dividends to shareholders. This makes stocks more attractive to investors.

Conversely, during economic downturns (such as the COVID-19 pandemic period), many companies are forced to cut dividends or halt dividend payments. At this point, investors withdraw capital, causing stock prices to plummet.

Monetary Policy Fluctuations

Interest rates are a powerful tool of central banks. When interest rates rise, the borrowing costs for businesses increase, reducing net profits and pushing stock prices down. At the same time, high interest rates make savings accounts or bonds more attractive compared to stocks, leading to capital outflows from the stock market.

Conversely, when interest rates fall, borrowing costs decrease, company profits increase, and investors tend to seek higher yields from stocks, driving prices up.

Inflation and Purchasing Power

High inflation weakens consumers’ purchasing power and increases production costs. To curb inflation, central banks often raise interest rates, which has a negative double effect on stock prices. When inflation is controlled, the business environment stabilizes, and stock prices tend to recover.

Currency Exchange Rates

For companies involved in import-export activities, exchange rates are decisive. If the national currency weakens, export products become cheaper, increasing sales and profits, thus pushing stock prices higher. The opposite scenario exerts downward pressure on stock prices.

GDP Growth and Household Income

When a country’s GDP grows, per capita income also rises. People have more capital to accumulate assets, including investments in stocks. Increased demand drives stock prices up. Expansionary fiscal policies also stimulate production investments, helping companies increase revenue.

Political and Social Stability

Political instability, conflicts, or unforeseen events cause investor anxiety. They often withdraw capital or halt investments, leading to free-fall in stock prices. Conversely, a stable political environment and clear policies build confidence, boosting stock prices.

The Law of Supply and Demand - The Mechanical Factor of the Market

Besides macro factors, the law of supply and demand plays a direct and immediate role. When many investors buy, stocks become scarce, and prices rise. When sell orders flood in, stocks become targets for liquidation, and prices fall.

However, a major trap here is the “herd effect.” New or inexperienced investors are very susceptible to follow trends, buying when others buy and selling when others sell. This can generate quick short-term profits, but the risks are high because prices can reverse rapidly.

Investor Psychology - The Intangible Factor

Two investors looking at the same stock can reach completely different conclusions. One sees the company stagnating and gives up. The other sees future growth potential and continues to hold.

Forecasts, analyses, or news from online experts also strongly influence this psychology. If you lack a solid knowledge foundation, it’s easy to become confused and frequently change decisions. This is why psychology is one of the most uncontrollable yet decisive factors.

Valuation Methods to Assess True Value

To determine whether the current stock price is appropriate, investors use various valuation methods:

P/E Ratio (Price/Earning)

This is the most common indicator. P/E is calculated by dividing the current stock price by the earnings per share over the past year.

A low P/E means you pay less for each unit of profit, leading to quicker capital recovery. A high P/E indicates less attractive profits. However, a high P/E can also reflect expectations of strong future growth.

P/B Ratio (Price/Book value)

P/B compares the market price with the book value (net assets) of the stock. This method is suitable for asset-heavy industries like banking or real estate but overlooks intangible assets such as brand, reputation, or market share.

A low P/B suggests the stock is undervalued relative to its intrinsic value. A high P/B indicates a higher valuation.

P/S Ratio (Price/Sales per Share)

P/S is the stock price divided by revenue per share. This indicator is less affected by accounting policies or cost management compared to P/E. P/S and stock price tend to move in tandem.

Dividend Discount Model (DDM)

This method assumes that the stock’s value equals the present value of all future dividends. It’s suitable for long-term investors and stable companies that regularly pay dividends.

Equity Free Cash Flow Discount Method (FCFE)

FCFE is the after-tax cash flow remaining for shareholders after debt payments, interest, and capital investments. This method provides a comprehensive view of the company’s true profitability for shareholders.

Free Cash Flow to Firm Discount Method (FCF)

This is the total after-tax cash flow from the company’s operations, regardless of capital sources. It assesses the intrinsic value of the entire enterprise, which is then divided by the number of shares to determine each share’s value.

Practical Actions for Investors

To optimize investment results, you need to combine knowledge of these influencing factors with modern tools. Real-time updated stock price tables allow you to monitor changes as they happen. Advanced trading orders like stop-loss and take-profit help control risks.

Additionally, technical analysis tools and indicators will help you seize buying and selling opportunities in a constantly fluctuating market.

Conclusion

Factors influencing stock prices form a complex system including macro elements (such as economy, policies, psychology), mechanical market factors (supply and demand), and the intrinsic financial aspects of each business. To become a successful investor, you cannot ignore any of these aspects.

Spend time learning, building a solid knowledge base, and practicing valuation methods. Combine this with intuition and good emotional management, and you will have the tools to make sound investment decisions and achieve sustainable profits.