Stock prices, like the prices of all goods, are determined by supply and demand. The supply of stocks are generally fixed at a set amount of shares which are determined by the corporation. The demand for the stocks is determined by a variety of factors. Generally, good news about the corporation increases the demand for the stock and, therefore, its price. Bad news about the corporation decreases the demand for the stock and, therefore, its price.
What would be examples of "good news" about a company?
1. Increased Profits - A report
about the increased profits of a company usually indicates that the company
prospering and may increase its dividends. This may draw investors and increase the price of a stock.
2. Take-Over Bids - A take over
bid is an attempt by one company to buy another through stock acquisition,
buying enough stock to control it. The stock for the company being taken over becomes more valuable as the
larger company makes offers. Investors want to own stock in the smaller company before the take-over, to share in
the price rise. The Philip Morris take-over of Kraft is such an example.
3. Divestiture - Large conglomerates
often have one division of their corporation which does not make money.
By announcing the sale of its losing interests, its potential for profits increases and its value will rise. For example,
Coca-Cola sold off its ownership of Pizza Hut and Taco Bell food outlets. Since these companies were not making
a very large profit, after they divested Coca-Cola's profits per share increased making the stock more attractive to
4. New Product Line - A company
which produces a new product, such as Coca-Cola's new Surge soft drink,
may draw investors who will bid up the price of the stock because they believe the new product will increase
profits for the company.
5. Government Spending - The government
buys one-third of all the products produced in this country. If the
government decides to buy products from a particular company, that company is virtually assured long term profits
and the value of their stock will rise. For example, the Defense Department decides to give a large contract to the
Boeing Corporation to produce 100 new Stealth Bombers.
What would be examples of "bad news" about a company?
1. Decreased Profits - report about
the decreased profits of a company usually indicates that the company is
doing poorly and may decrease its dividends. This may detract investors and decrease the price of a stock.
2. Accidents, Health Problems -
For example, the Exxon oil spill in Alaska required billions of Exxon's
for cleanup, which in turn lowered the profits of the company. Reports that red meat increases the risk of heart
problems, caused the consumption of beef to decline and lowered the profits of the Armour Food Processing
3. Lawsuits - Legal problems tend
to make investors sell their stocks. If the Securities and Exchange
Commission decides to investigate a company, investors might be scared off and the price of a stock will be lowered.
For example, the investigation the Archer Daniels Midland Company (ADM) was investigated for price fixing of
food additives and was fined millions of dollars. Tobacco companies are currently being sued by many states
to recover health care costs to treat cancer victims.
Other Factors Which Affect Stock Prices In General
1. Interest Rates - High interest
rates make it harder for companies to borrow money for expansion. This
result in slower growth and lower their profits, thereby reducing the value of their stocks. Stable or lower interest
rates encourage borrowing and growth which tends to make stock prices rise.
2. International Events - Wars,
political events such as revolutions, the death of a leader, and the formation
world wide cartel such as OPEC can influence stock prices in the United States.
3. Tax Policies - Increases in
taxes on businesses or consumers tend to lower the value of stock because
profits will decline. Tax cuts tend to increase the value of stock because profits and sales will increase.
Last updated July 21, 1999
by Megan McCarthy