Determinants of Daily Stock Price Change - Coursework Example

 Determinants of Daily Stock Price Change Introduction Share market price fluctuation is an extremely critical element to the economic measures of a country. A number of economic variables like exchange rates, export and import levels, bank rates etc are more or less influenced largely by stock market price. As economists agreed up on, there are market forces that cause stock price to change every day. This piece of research paper presents stock market price variations from April 18, 2011 to April 27, 2011 to analyze and assess why the stock market price changes every day and what specific factors cause significant changes in daily stock market pricing. Based on relevant literature and economic theory, this paper explains why there is stock market price change almost every day. Determinants of Stock Market Price changes The table given below is a summary of stock price changes of Apple Inc, American Express, Ameriprise Financial Inc, Noble Corp and Johnson and Johnson, extracted from Bloomberg.com. This table illustrates daily stock price changes for the above mentioned companies. According to economists, there are various reasons and driving forces for this stock market price changes.   Apr-18 Apr-19 Daily Price Change Apr-20 Apr-21 Daily Price Change Apr-26 Apr-27 Daily Price Change Apple Inc 437.92 438.95 0.30% 439.3 448.21 2.00% 455.13 456.5 0.30% American Express 53.05 52.67 0.70% 52.67 52.83 0.30%       Ameriprise Financial Inc 69.7 70.1 0.60%       70.4 70.1 0.30% Noble Corp 46.79 46.82 0.10%       47.55 47.49 0.10% Johnson and Johnson 64.56 64.75 0.30% 65.11 65.44 0.33%       Source: Rose, April 19, 2011, Rose, April 21, 2011, Rose April 25, 2011 and Rose April 27, 2011 The major forces in the market are demand and supply and the same play significant roles in fluctuating the stock price too. The above table shows that stock price of different companies change almost every day in different proportions. For instance, Apple’s share price change was 0.30% between April 18 and April 19 and 0.20% between April 20 and April 21. This change is the result of market forces namely demand and supply. In simple economic terms, if more people want to buy a commodity (share) than they want to sell it, then the price essentially increases. If more people want to sell it than buy it, then price conversely move down. It is highly important to understand what makes people prefer a particular share to another one. People like a stock only when they get good and positive news about the company, such as company’s earning. Investopedia (2011) considers market capitalization and company’s earning as major measures that people value stock price of a company. The value of a company is perhaps its market capitalization which can be found by multiplying the stock price by the outstanding shares. For instance, a company that sells its share at $250 and it has 10,000 outstanding shares has considerably less value than a company that sells its share at $100 and has 30,000 outstanding shares (250*10,000 = 250,000 whereas 100*30,000 is 300,000). People anticipate and even extensively go for studying the earnings or profitability of a company when they think to buy or sell its share, and if this causes them to buy more, as a result the demand will be more and the price will move up. If people find that company not to be profitable in long-run, they eventually will like to sell its shares and it will increases its supply causing price to decrease. Brigham and Houston (p. 10) explained that stock price changes over time as conditions change and investors obtain new information about a company’s prospects. A good example that he mentioned was stock price variation of Apple Inc. Its stock price ranged from $77 to 4193 between 12 months in 2008 rising and falling as good and bad news about the company released. Stock Price change and Gordon Growth model Gordon Growth model is method for determining the intrinsic value of a stock on the basis of future series of dividends that are most likely to grow in a constant rate. According to this method, the stock value can be found by using the formulae given below: D= expected dividend per share one year from now k- Required rate of return for equity investor, G- Growth rate in dividend (Guinan, 2009). Though the Gordon Growth model provides a simple approach to valuing the equity of a company, it can be used only for those firms that are growing at a stable growth rate. For instance, Apple Inc has been recording constant growth for last few years and hence this method can be effectively applied for valuing its stock. Conclusion This piece of paper has highlighted significant determinants for the stock price change and has detailed how and why stock price change almost daily for most of the companies. This paper pointed that demand and supply are the main market forces behind price change for the stock too, but people anticipate stock values based on various factor like company’s earning and market capitalization etc. References Brigham, EF and Houston, JF, Fundamentals of Financial Management, Twelfth Edition, Cengage Learning, 2009 Guinan J, The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett, Illustrated edition, McGraw Hill Professional, 2009 Investopedia.com, Stocks Basics, What causes Stock Prices to Change, retrieved 29th April 2011 from http://www.investopedia.com/university/stocks/stocks4.asp, 2011 Rose, S, S&P 500 Analyst Target Price Changes for April 19, Bloomberg.com, Retrieved 29th April 2011 from http://www.bloomberg.com/news/2011-04-19/s-p-500-analyst-target-price-changes-for-april-19-table-.html, April 19, 2011 Rose, S, S&P 500 Analyst Target Price Changes for April 21, Bloomberg.com, Retrieved 29th April 2011 from http://www.bloomberg.com/news/2011-04-21/s-p-500-analyst-target-price-changes-for-april-21-table-.html, April 21, 2011 Rose, S, S&P 500 Analyst Target Price Changes for April 25, Bloomberg.com, Retrieved 29th April 2011 from http://www.bloomberg.com/news/2011-04-25/s-p-500-analyst-target-price-changes-for-april-25-table-.html, April 25, 2011 Rose, S, S&P 500 Analyst Target Price Changes for April 27, Bloomberg.com, Retrieved 29th April 2011 from http://www.bloomberg.com/news/2011-04-27/s-p-500-analyst-target-price-changes-for-april-27-table-.html, April 27, 2011 Read More