Factors that can affect stock prices

Many factors can cause the price of a stock to rise or fall – from specific news about a company’s earnings to a change in how investors feel about the stock market in general.

Company news and performance

Here are some company-specific factors that can affect the share price:

  • news releases on earnings and profits, and future estimated earnings
  • announcement of dividends
  • introduction of a new product or a product recall
  • securing a new large contract
  • employee layoffs
  • anticipated takeover or merger
  • a change of management
  • accounting errors or scandals

Industry performance

Often, the stock price of the companies in the same industry will move in tandem with each other. This is because market conditions generally affect the companies in the same industry the same way. But sometimes, the stock price of a company will benefit from a piece of bad news for its competitor if the companies are competing for the same market.

Investor sentiment

Investor sentiment or confidence can cause the market to go up or down, which can cause stock prices to rise or fall. The general direction that the stock market takes can affect the value of a stock:

  • bull market – a strong stock market where stock prices are rising and investor confidence is growing. It’s often tied to economic recovery or an economic boom, as well as investor optimism.
  • bear marketBear market A weak market where stock prices fall and investor confidence fades. Often happens when an economy is in recession and unemployment is high, with rising prices.+ read full definition a weak market where stockStock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions.+ read full definition prices are falling and investor confidence is fading. It often happens when an economy is in recession and unemployment is high, with rising prices.

Economic factors

1. Interest rates

The Bank of Canada can raise or lower interest rates to stabilize or stimulate the Canadian economy. This is known as monetary policy. If a company borrows money to expand and improve its business, higher interest rates will affect the cost of its debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition. This can reduce company profitsProfits A financial gain for a person or company. Equals the money left over after you subtract your costs from the money you made.+ read full definition and the dividends it pays shareholders. As a result, its shareShare A piece of ownership in a company. A share does not give you direct control over the company’s daily operations. But it does let you get a share of profits if the company pays dividends.+ read full definition price may drop. And, in times of higher interest rates, investments that pay interest tend to be more attractive to investors than stocks.

2. Economic outlook

If it looks like the economy is going to expand, stock prices may rise. Investors may buy more stocks thinking they will see future profits and higher stock prices. If the economic outlook is uncertain, investors may reduce their buying or start selling.

3. Inflation

InflationInflation A rise in the cost of goods and services over a set period of time. This means a dollar can buy fewer goods over time. In most cases, inflation is measured by the Consumer Price Index.+ read full definition means higher consumer prices. This often slows sales and reduces profits. Higher prices will also often lead to higher interest rates. For example, the Bank of Canada may raise interest rates to slow down inflation. These changes will tend to bring down stock prices. Commodities however, may do better with inflation, so their prices may rise.

4. Deflation

Falling prices tend to mean lower profits for companies and decreased economic activity. Stock prices may go down, and investors may start selling their shares and move to fixed-income investments like bonds. Interest rates may be lowered to encourage people to borrow more. The goal is increased spending and economic activity. The Great Depression (1929-1939) was one of the worst periods of deflationDeflation A drop in the cost of goods and services over time. Often happens when the supply of money or credit shrinks, or when consumers or government cut spending. This means the same number of dollars will buy more.+ read full definition ever.

5. Economic and political shocks

Changes around the world can affect both the economy and stock prices. For example, a rise in energy costs can lead to lower sales, lower profits and lower stock prices. An act of terrorism can also lead to a downturn in economic activity and a fall in stock prices.

6. Changes in economic policy

If a new government comes into power, it may decide to make new policies. Sometimes these changes can be seen as good for business, and sometimes not. They may lead to changes in inflation and interest rates, which in turn may affect stock prices.

7. The value of the Canadian dollar

Many Canadian companies sell products to buyers in other countries. If the Canadian dollar rises, their customers will have to spend more to buy Canadian goods. This can drive down sales, which in turn can lead to lower stock prices. When the price of the Canadian dollar falls, it makes it cheaper for others to buy our products. This can make stock prices rise.

Key point

Stock prices can be affected by:

  • company news and performance
  • industry performance
  • investor sentiment
  • economic factors
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