Most of the stock trading takes place on the stock markets, such as the New York Stock Exchange or the London Stock Exchange, which makes it easier to buy and sell stocks between different parties. You have to be registered to be able to operate directly in the market, so most people will do it through a broker.
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What factors drive the stock market?
As with any financial market, the biggest driver of volatility in stock prices is the level of supply and demand.
Offer of shares
There are always a limited number of shares available in any company, although it may decide to issue more or buy back a certain number to reduce the offer in the market. If a company issues more shares and demand does not rise to accommodate the growing supply, the share price will decrease. On the other hand, a buyback without a corresponding decrease in demand will increase the company’s share price.
Demand for shares
While companies typically have tight control over the level of supply of their shares in the market, demand can fluctuate due to a variety of factors. Here we take a look at three of the most important and should be monitored: reporting of results, external factors and market sentiment.
Most stock markets require listed companies to publish reports detailing their financial performance each quarter and a full report once a year. The figures in these reports generally have a very noticeable influence on the company’s share price, as investors analyze all the details as an essential part of their fundamental analysis.
The fundamental analysis involves the study of all the internal and external factors that make up the fair value of a company, which is subsequently compared with the real market price. If a stock appears devalued, it could be an opportunity to buy. If, on the contrary, it is overvalued, it could present a sales opportunity. A company’s financial performance offers a great clue to its current fair value. These are some of the most important fundamental data in the results reports that can affect demand.
The capital is that the company is generating, without discounting expenses. The really important thing is to see if the income is growing: a company can improve its benefits by cutting costs, but if the income is stagnant it could be a bad indicator of what is to come.
Benefits: Income minus expenses
Profits determine how much money you are making and can be paid to investors in the form of a dividend or reinvested in business development.
Earnings per share (EPS)
Profits divided by the number of shares available on the market. EPS is an important metric in earnings reporting, which basically shows how much of the company’s value is earned by buying a single share.
Price or benefit ratio (PER)
Share price divided by the EPS. The PER shows the value of a share when we compare it with the current profitability of the company. Although it does not usually appear in earnings reports, it is calculated using EPS and share price data.