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Theprice of a company can be driven by hype or "buzz" caused by the rise and fall of fashion trends, press coverage, rumour, speculation and even a well-publicised .
Regardless of whether or not the attention is justified, it can have a negative or positive impact on a share price.
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The latest thing
A company that is forward-thinking enough to introduce a cutting-edge product – or lucky enough to have its existing products favoured by a new fad – can see its share price rise as consumers rush to buy the latest "must-have" item.
A good example of this is Apple, which transformed its fortunes by putting attractive design at the forefront of its products and helped revolutionise the mobile phone market with the launch of its iconic iPhone.
Being viewed as fashionable can push a company's share price up dramatically. Fashion trends are however fickle and the end of a fad, or the launch of an even more impressive product by a rival, can see share prices in once-fashionable brands slide suddenly.
Shareholder meetings and company announcements
In the run-up to a company's earnings report ormeeting, often speculate about what will be revealed.
If the market expects a positive announcement, traders tend to buy the company's stock in anticipation of a share price rise once the news is released.
This can push up a company's share price regardless of how it has been performing in reality.
As soon as the announcement is out, the share price will move depending on how close the actual results were to traders' expectations.
If its results or announcement are worse than expected, the company's share price can dive. If however, they are just as good as expected (but no better), it is possible that they will not rise any further – or may even dip slightly – because the positive news has already been 'priced in'.
A company's share price can also be affected by press coverage.
The way in which the company has been highlighted in the press will affect whether its share price goes up or down, and by how much.
For example, if a company attracts press coverage because it is suspected of doing something illegal or morally wrong, or has simply been performing very badly, its share price will usually slide further depending on how critical and how widely reported the story is.
One example is BP following its Gulf of Mexico oil spill in 2010.
Intense press coverage of the spill's effect on surrounding wildlife and local communities meant that the company's share price fell much more dramatically as speculation grew regarding its final clean-up and compensation bill.
Rumours can also have a big effect on the share price of a company.
These are unproven claims – possibly about a potential merger and acquisition, product development or board room change – that spread quickly among traders and lead to a dramatic increase or decrease in the price of a share.
If the rumour is positive this can lead to an increase in a company's share price. Conversely, a negative rumour can damage its share price.
An official denial of rumours can have a counteracting impact on a share price. For example, if a company's share price rises because it is rumoured to have a new product in development, the share price can then fall back down if the company denies it.
Initial public offerings (IPOs)
When a company's shares first go on sale on thein an intial public offering (IPO), they can attract a flurry of interest that lifts its share price in the short term.
If the listing attracts a lot of attention, the price at which the company's shares are first offered can move higher before the listing. The shares can also then spike higher in the short term immediately following the IPO.
In the longer term, however, this can have a negative impact on the company's share price as traders try to take advantage of the short-term hype to sell stock at a much higher price than the company's true value. This can ultimately push down its share price.
A company's IPO can also pressure or support the share prices of other companies in the same sector or listed on the same index.
If the company looking to list on an index, it is deemed to be a better investment than other companies in the same sector or index. This can persuade traders to pull money out of other shares to buy shares in the upcoming IPO. This will push down the share price of its rivals.
However, the buzz surrounding an IPO can also increase traders' interest in the company's business sector overall, and this can support the share price of similar companies.
In this lesson you have learned that…
- ... the share price of a company can be driven by hype or "buzz" caused by the rise or fall of fashion trends, press coverage, rumour, speculation and even a well-publicised IPO, regardless of whether or not the attention is justified.
- ... a company that introduces a cutting-edge product, or stumbles upon the next big gimmick, can see its share price rise as consumers rush to buy the latest "must-have" item.
- ... in the run-up up to a company's earnings report or shareholder meeting, traders will often speculate about what will be revealed. If they expect a positive announcement, they may buy the company's stock and push up its share price.
- ... once an announcement has been made the share price will move again, depending on the result – down if it is worse than traders expected, flat if it is the same as traders expected and up if it is better than traders expected.
- ... press coverage will also affect a company's share price, pushing it up or down depending on whether reports focus on positive or negative news.
- ... rumours will similarly affect a company's share price, pushing it up or down depending on whether they are positive or negative.
- ... a company's share price can often move higher just before and after an IPO if the listing attracts a lot of interest.
- ... a company's IPO can also pressure or support the share prices of other companies in the same sector or listed on the same index.
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