You can rarely be certain why share prices rise and fall. This is because there
are so many factors that can influence the price at which buyers and sellers are
willing to exchange shares.
Management
The market’s perception of management within a company will have some effect on the price of its shares. For example, the news that a new Managing Director has been appointed to a company may influence share price favourably if that person is considered to be the right person for the job.
Takeovers
An individual company’s share price may also change if it is the subject of a takeover bid where one company wishes to buy or take control of another company. Generally companies launch takeover bids because they expect there will be benefits such as increased profitability from acquiring the company.
Technological innovation
A company’s share price may change if there has been a technological breakthrough that suggests strong profit growth in the future. For example, shares in Biotec Company, “Prima Biomed” closed 25 percent higher on 16 July 2003 after news of positive results from the use of its cancer-fighting therapy on terminally ill patients.
Disclosure of other price sensitive information
Listed companies must inform ASX of any information that may affect share price. For example, if a Gold company discovers a new deposit of gold the share price is likely to rise. A company’s share price may change if a large contract to do more business has been won or the company has released a financial report detailing its profitability.
Factors that may influence the share market as a whole
There are many other factors that affect the share market as a whole such as interest rates, exchange rates, government policies, overseas financial markets and our perceptions about how particular shares, or the share market in general will perform.
Interest rates
Interest is the money charged by a lender to a borrower for the use of his or her money. High interest rates may directly affect companies who themselves are large borrowers of funds. Increased interest rate costs may lower profitability of the company, which may then affect share price. High interest rates may also affect companies indirectly as
other businesses review their future plans. Consumer spending may also decrease due to the higher interest rates to be paid.Investors themselves may be directly affected by high interest rates as they may divert their investments from low-yielding shares to fixed interest securities paying higher interest.
Exchange rates
An exchange rate is the rate at which one currency may be converted into another. A rising Australian dollar may reduce the demand for exported goods as they become more expensive. When the dollar rises relative to other currencies imports may become cheaper, putting pressure on companies competing with imported goods.
The Australian dollar may also influence the demand for shares traded on ASX as many foreign investors buy shares in ASX listed companies.
Government policies
Any change in the rules under which companies are taxed will have a direct impact on the profitability of the company and therefore share prices. The tax share investors must pay will have a direct impact on the investments they choose in future.
The Government may also influence the volume of money and credit available though issuing bonds offering attractive interest rates. A bond is a certificate issued by a semi-government or government body to raise money. Holders of bonds lend their money in return for a fixed rate of interest over a set period of time. When the Government issues
bonds at attractive rates, resources may be diverted away from the share market to other investment forms. The Government may also volunteer to buy back government bonds at attractive rates which, may increase the money supply and therefore available funds to be reinvested in the share market. Government expenditure is also watched closely by the market to determine its effect on economic growth and the money supply.
Commodity prices
The price of certain commodities (e.g. oil, coffee wool, grain, sugar, metal) on the world market may affect share price. For example, a company engaged in gold mining is unlikely to achieve exceptional profit results if the price of gold is low.
Approximately 30 percent of listed companies on ASX are in the resource sector, so energy and metal prices will have a dramatic affect on the share market.
Other financial markets and economies
Movements in other overseas financial markets can influence the Share market. If we wake to hear news that the Dow Jones Index in New York has dropped a significant number of points overnight there may be a reaction to this when the Australian
Share market opens at 10 a.m. The effect may in part be psychological as some investors begin to worry that share prices on the Australian share market are likely to fall and sell shares to avoid any further losses.
Famous Quote
There’s an old saying that when America sneezes, the world catches a cold.