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Usually when a company is doing well the prices of its shares will go up. But sometimes the stock prices goes up irrespective of how high or low the company's profit or dividend are. Why is this so?
Are the main reasons for share prices going up or down based on the company's profit earnings and dividends or are there other reasons? Also why does the share prices of some companies not go up even when the company provides good high dividends to their shareholders?
There are many things that can make a company's share price go up or down. Generally, over the long term, the more consistently profitable a company is the more its share price will go up. However, there are times when a company may not be making any profits yet but its share price still goes up. This can be due to forecasts that the company will start making profits in the near future.
Sometimes a company may report increased profits from the previous year but makes less than what the market was expecting it to make. This can cause its share price to fall, as the market is disappointed in the results. In the shorter term greed, fear and speculation can make a company's share price move irrationally. When you think the share price should be going up it suddenly falls, and Vis-versa.
When interest rates are low, companies with higher dividend yields (compared to bank account interest rates) become high in demand and their shares generally go up in price. As the share price goes up the dividend yield will be reduced unless the company continues to increase the dividend it distributes to shareholders. When interest rates start to rise these companies become less favourable as they are seen as higher risk comparable to similar returns from having one's money in the safety of the bank. This can cause the share prices to fall.
These are just some of the reasons that make a company's share price move up or down. As humans are an irrational bunch often ruled by emotions, sometimes the reasons share prices move in a particular direction can be quite confusing, but that is the nature of the financial markets.
Here are some significant factors affect the company stock price performance:
Usually, profitability is known to the public through the financial statements; it won't be 100% accurate and people would also trade the stock with the price not matching to the true value of the firm.
Still there are dozens of other various reasons exist. People are just not behaving as rational as what the textbook describes when they are trading and investing.
It's been said before, but to repeat succinctly, a company's current share price is no more or less than what "the market" thinks that share is worth, as measured by the price at which the shares are being bought and sold. As such, a lot of things can affect that price, some of them material, others ethereal.
A common reason to own stock is to share the profits of the company; by owning 1 share out of 1 million shares outstanding, you are entitled to 1/1000000 of that company's quarterly profits (if any). These are paid out as dividends. Two key measurements are based on these dividend payments; the first is "earnings per share", which is the company's stated quarterly profits, divided by outstanding shares, with the second being the "price-earnings ratio" which is the current price of the stock divided by its EPS. Your expected "yield" on this stock is more or less the inverse of this number; if a company has a P/E ratio of 20, then all things being equal, if you invest $100 in this stock you can expect a return of $5, or 5% (1/20).
As such, changes in the expected earnings per share can cause the share price to rise or fall to maintain a P/E ratio that the pool of buyers are willing to tolerate. News that a company might miss its profit expectations, due to a decrease in consumer demand, an increase in raw materials costs, labor, financing, or any of a multitude of things that industry analysts watch, can cause the stock price to drop sharply as people look for better investments with higher yields. However, a large P/E ratio is not necessarily a bad thing, especially for a large stable company. That stability means the company is better able to weather economic problems, and thus it is a lower risk.
Now, not all companies issue dividends. Apple is probably the most well-known example. The company simply retains all its earnings to reinvest in itself. This is typically the strategy of a smaller start-up; whether they're making good money or not, they typically want to keep what they make so they can keep growing, and the shareholders are usually fine with that. Why? Well, because there's more than one way to value a company, and more than one way to look at a stock. Owning one share of a stock can be seen quite literally as owning a share of that company. The share can then be valued as a fraction of the company's total assets.
Sounds simple, but it isn't, because not every asset the company owns has a line in the financial statements. A company's brand name, for instance, has no tangible value, and yet it is probably the most valuable single thing Apple owns. Similarly, intellectual property doesn't have a "book value" on a company's balance sheet, but again, these are huge contributors to the success and profitability of a company like Apple; the company is viewed as a center of innovation, and if it were not doing any innovating, it would very quickly be seen as a middleman for some other company's ideas and products. A company can't sustain that position for long even if it's raking in the money in the meantime.
Overall, the value of a company is generally a combination of these two things; by owning a portion of stock, you own a piece of the company's assets, and also claim a piece of their profits. A large company with a lot of material assets and very little debt can be highly valued based solely on the sum of its parts, even if profits are lagging. Conversely, a company more or less operating out of a storage unit can have a patent on the cure for cancer, and be shoveling money into their coffers with bulldozers.
I always liked the answer that in the short term, the market is a voting machine and in the long term the market is a weighing machine.
People can "vote" a stock up or down in the short term. In the long term, typically, the intrinsic value of a company will be reflected in the price.
It's a rule of thumb, not perfect, but it is generally true.
I think it's from an old investing book that talks about "Mr. Market". Maybe it's from one of Warren Buffet's annual letters. Anyone know? :)
