Internal and External Factors Affecting Share Price
Countless factors affect the share price of a company's stock. Some of these fall directly under the company’s control or reflect the perception of the strength of the business itself. Other times, a share price can be buffeted by external events that the company has no possibility of influencing.
Shareholders look to a company’s financials as an indicator of what the business is worth. Corporate earnings and the ability to exceed Wall Street expectations can move shares in a positive direction. When earnings are passed back to investors in the form of dividends, this also can boost share prices. Unexpected losses or a failure to reach revenue or profit targets can lower value.
Part of shareholder value comes from investor confidence in management. If investors are impressed with the quality of the company’s decision-makers and the overall strategic direction, they’ll likely be more optimistic about the company’s direction going forward and bid up the share price. An untested management team or a senior leadership group that didn’t succeed elsewhere can have the opposite effect, even if the current financial numbers aren't bad.
Businesses can’t control larger economic and political trends, but both can affect stock prices. Political instability in a location where a company operates can cause investor confidence to decrease. A recession or depression may have the same effect, while an economic boom can increase the share price of companies. Even a company with strong fundamental numbers, for example, can see its share price drop if it does business in a region that’s going through political upheaval, as investors fear the conflicts may affect the company's ability to operate.
Companies can find their share price affected if regulatory changes are perceived to affect value or if a new entrant into the marketplace changes the competitive landscape. For example, a company that relies on low-wage labor can find its stock price lowered if investors believe labor costs will rise with a pending minimum wage increase. The share price of a smaller company can be impacted if a larger, more-established competitor enters the marketplace -- or if a rival goes out of business.
Sometimes, the biggest factor influencing a stock price is investor belief in the company and its ideas. Businesses with nothing on their financial record but heavy losses can still be valued highly because the product or service they offer catches the fancy of shareholders -- especially in technology-based ventures where innovation is prized heavily. While these stocks may fluctuate wildly, the lure of the long-term reward may outweigh the risks for some investors, which is reflected in the share price.