The impact of the outside world

Before reading this lesson, you should have read through:

A company's share price is affected by much more than the business performance of the company itself.

A company's share price is affected by much more than the actions of the company itself. A range of factors, many of them outside the company's control, will raise or decrease demand for its shares.

The price of a share is driven by whether traders want to buy it or sell it, and in what volumes.

If traders like the look of a company's profit, leadership or future growth prospects and they think these factors will push up demand for its shares, they will be more likely to buy those shares in the hope of selling them for a profit later on.

If they are unimpressed with a company's health and prospects and think this will push down demand for its shares, they will be more likely to sell them.

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The bigger picture

However, this is only one part of a much broader picture. A huge variety of factors affect a company's share price, many of them beyond the company's control.

Government actions can change the business environment a company operates in, making it easier or harder for the company to compete with rivals and earn a profit.

Government actions can change the business environment a company operates in, making it easier or harder for the company to compete with rivals and earn a profit.

The general health of the economy can stimulate or decrease demand for a company's products and services, as well as affecting traders' appetite for investing in risky assets like stocks.

Demand for shares in general can rise or fall depending on what time of the year, month or even week it is, especially as traders rely more and more on historical price charts to predict price moves.

Meanwhile, market hype driven by rumours, fashion trends, press coverage or a well-publicised IPO can push a company’s share price up or down, regardless of whether the attention is deserved.

Changes in the price of commodities that a company produces or consumes can push up or down its earnings and share price.

Changes in the price of other assets can also impact share prices. Higher prices for a commodity like oil, for example, can push a company's share price up or down depending on whether it produces or consumes the resource.

Currency exchange rate fluctuations meanwhile, may make it more, or less, expensive for a company to import the goods it needs and more, or less, lucrative to export its end product.

It is vital to keep your eye on the wider horizon when you trade shares, factoring in everything from government actions to foreign exchange rates when you trade shares.

As the world economy becomes more interconnected, geopolitical factors such as a change of government, a war or even the weather can also push around share prices – regardless of how far from a trader's home country these events occur.

Traders need to keep their eye on the wider horizon, factoring in all of the above when they are trying to determine which direction a share price will take next.

The following lessons will explore these issues in more detail.

Summary

In this lesson, you have learned that ...

  • ... a company's share price is affected by much more than the business performance of the company itself.
  • ... government actions can change the business environment a company operates in, making it easier or harder for the company to compete with rivals and earn a profit.
  • ... the general health of the economy can stimulate or decrease demand for a company's products and services, as well as affecting traders' appetite for investing in risky assets like stocks.
  • ... demand for shares in general can rise or fall depending on what time of the year, month or even week it is, especially as traders rely more on historical price charts to predict price moves.
  • ... market hype driven by rumours, fashion trends, press coverage or a well-publicised IPO can push a company's share price up or down, regardless of whether the attention is deserved.
  • ... changes in the price of commodities that a company produces or consumes can push up or down its earnings and share price.
  • ... foreign exchange rates can make it more, or less, expensive for a company to import the goods it needs and more, or less, lucrative to exports its end product.
  • ... geopolitical factors such as a change of government, a war or even the weather can also push around share prices, regardless of how far from a trader's home country these events occur.
  • ... traders therefore need to keep their eye on the wider horizon, factoring in all of the above when they are trying to determine which direction a share price will take next.

Keep your eyes open, react quickly and make your own way to wealth!


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