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October 22, 2016

Factors Affecting a Stock's Share Price

If you are new to trading on the stock exchange, there may be some things you want to know prior to making that first investment. One of those things is at least a basic understanding of what affects a stock’s share price. Unless you know how the market moves, you could leave yourself open to some really bad moves that would result in huge losses. Actually, the two mostfundamental factors that affect stock prices should be understood first. Those factors include Earnings Per Share (EPS) and a multiple of valuation or valuation multiple.

Earnings Per Share

Earnings Per Share is, as the name would seem to imply, that amount of profit allocated to each share. It’s all about the overall profitability of a company and investors try to predict, given the current market and how that particular stock has gained (or lost) so as to determine whether or not there will be enough earnings, a big enough profit margin, to justify buying that stock. The net profit is divided by the number of shares and this number is the EPS you are looking at. Some investors who really get into it look at a variety of EPS values over a particular period of time to see how that stock is performing and is it gaining in terms of percentage of valuation or is the share simply rising proportionately.

Valuation Multiple

This one is not as straightforward or easy to understand as the EPS but the multiples approach is a fundamental factor in determining whether or not you should invest in a particular stock. A basic explanation would be that using a valuation technique would mean that you would assess this stock against others that are similar. How is it moving in comparison? Is it doing better with a bigger profit margin? Is it losing against other similar stocks on the market? This is much more complex, although considered to be a ‘fundamental’ affecting a stock’s share price.

Market Variables Such as Takeovers

Sometimes one company is selling out for any reason which could include poor performance in the past trading quarter, owners retiring or going on to pursue new ventures to name a couple. When it comes to poor performance or under-performing projections, a takeover could have an immediate impact on the stock’s share price. A hostile takeover can go either way but many times the stock’s share price will rise because that hostile takeover was made possible because of a company’s poor performance and failure to keep current on what is happening on the market. If the company doing the takeover has a solid record of turning bankrupt and under-performing companies around.

One example is the recent takeover of Sun Bingo by an Israeli firm. Playtech was surrounded in excitement as their earlier attempt to takeover Plus500 fell through. Playtech couldn’t comply with what the Financial Conduct Authority needed them to do by year’s end so they placed their money and their amazing ability to make money into taking over Sun Bingo, a UK online gaming site specialising in what else? Bingo! Stock share prices immediately gained in value and are continuing to climb.

So with these three things in mind, you know what to look for when first trying to enter the exchange. It is suggested that you really take the time to learn how stock share prices are valued so that you make wise investments. This information is just a basic overview but should suffice to tell you that it is an exciting way to make money once you understand how it’s done. Stock share prices and their movement is just one thing to look at. Next you’ll need to know how to understand key market indicators in order to forecast which way you believe the market will move. And from there, there’s much, much more to learn – but it’s always interesting and never boring. Get set for the ride of your life.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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