What impacts share prices?

A company’s share price tends to reflect not so much what it has achieved in the past but whether or not it is expected to grow earnings and profit in the future.

Companies announce their financial results twice a year and many also provide trading updates in between.

These results include its revenue, expenditure, earnings and profit and usually an outlook for the forthcoming period.

If a company consistently grows its earnings and profit then its share price is likely to go up.

However, because there is so much coverage of companies from brokers, analysts and media, the expected outcome of these results is often already factored into a share price.

Investor expectations

A share price could suffer a short term fall even when a company announces earnings and profit growth, because the growth didn’t match the expectation of investors.

Remember that shares listed on the ASX, for example, are traded very frequently and in large volumes by institutional investors, like fund managers, insurance companies and pension funds, who may try to anticipate how other investors will react to upcoming news or events.

This is why, as a long term investor, it is preferable to not pay too much attention to short term ups and downs.

Still, share prices rise and fall every day, broadly reflecting the changing expectations about the ability of companies to grow their earnings and profit.

This can also be influenced by other announcements that companies issue to the stock exchange, which are often covered by the media.

These could include the acquisition or sale of assets, new contracts or plans to borrow money, for example, and can result in share prices moving up or down sharply depending on how the news is interpreted by investors.

Other factors

Investor expectations can also be impacted by a variety of other factors, such as a company undergoing a change in management or a legal case, for example, or a new government, changing interest rates or a pick up or slowdown in economic growth.

The broader economy can have a large bearing on share prices because when unemployment and inflation are under control and consumers and businesses are spending with confidence, companies should have a better chance of growing, which can lift share prices.

But if the economic outlook is less positive, then market sentiment and demand for shares tends to decrease and when more people want to sell shares than buy them, prices go down.

These factors can mean that a company’s share price will not always move in the same direction as its business performance.

The share price of all companies can be impacted by both internal and external factors, but some companies are far more exposed to changing economic conditions than others.