The Reasons Why...
by andrew@JijiniMarkets - Thu 04 Jan 2007
The factors that affect or determine a stock's price can be broadly grouped into data-driven and event-driven factors. These can further be sub-divided into internal or external factors.
Internal data-driven factors include earnings figures, profit/loss margins, sales, cash flow and debt levels. All are based on the financial activities of the given company as reflected in its balance sheet. External data-driven factors are used as relative measures of a stock's value. These include prevailing interest rates, sector/market valuations (e.g. average P/E ratio and average earnings), inflation rates, employment rates, etc. Investment decisions based around data-driven factors tend to be long-term as market forces usually take time before they factor in a company's data into its share price. Moreover, data-driven investors tend to be value investors interested in realising long-term dividend income and long-term share price appreciation irrespective of short-term share price movements.
Some events that impact on stock prices are: dividend payments; mergers or takeovers; product launches; share splits; managerial changes; natural disasters (hurricanes, floods, drought, etc); and wars. These can be internal or external depending on the origin of the event. Price changes due to event-driven factors tend to be instantaneous and short-lived thereby making related investment strategies short-term.
Majority of investment strategies incorporate, to some degree, all of the above factors. After buying a stock due to a given market event, an investor may chose to hold on to it due to favourable company data. Similarly, investors holding a stock due to positive data figures may opt to sell due to market events that may radically affect the share price. In deciding to buy or hold a stock, it is important to identify the reasons for making the decision and the time-frame within which the reasons remain valid.
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