What are Equities

Equities are shares that are offered by publicly traded companies. Shares can be purchased and sold though financial stock markets such as the London Stock Exchange and the New York Stock Exchange.

What affects a stock’s price?


The price of a stock can be affected by several key elements. Here we will discuss some of the major drivers of stock movement, including importance of company earnings, analyst ratings and general industry events.


1. Company Earnings


1. Company Earnings

The most critical factor that affects the value of a company is its earnings. Every three months, publicly traded companies report their earnings for the previous quarter. A company’s reported earnings can be a valuable indicator of its financial health and therefore can be a key driver of stock prices. In addition to giving an account of a company’s performance over the past months, earnings reports can also be important measures of the effectiveness of a company’s current strategy. Strong earnings reported often lead to a stock’s increase in value, whereas reports of weak earnings will typically see a company’s stock prices decreasing.

Stock prices can often reflect investors’ expectations; for example, a stock price could increase due to many investors looking at data and extrapolating that a company’s value will rise – or continue to rise - in the future.

Prior to earnings reports being issued, stock analysts carry out in-depth research and release estimates of a company’s earnings for that quarter. These forecasts are then released by research companies as ‘consensus estimates’, which can also influence the price of a stock. However, not all predictions are accurate, and if the actual profits of a company differ from its predicted profits, a company’s stock price will quickly readjust to this new information.

For example, a company’s earnings report may show a reasonable profit made during the past season, but if it has not met the consensus estimate, that company’s stock price may decline. Alternatively, a company may announce a loss for the quarter, but if this loss is smaller than that predicted by the analysts, the company’s stocks may see an increase in price.


2. Analyst Ratings


2. Analyst Ratings

In addition to forecasting a company’s future earnings, analysts also provide views on many major stocks in the form of ratings. Ratings are part of a research report, which have in-depth recommendations on specific securities that investors can act upon.

In a research report, an analyst performs a thorough investigation into a particular security and subsequently concludes whether that security is a "buy", “sell", “hold", “underperform” or “outperform”. Here we describe these five main categories in some more detail:

Sell - a recommendation to sell a stock or to liquidate an asset.
Underperform - indicates that a stock is predicted to perform poorly in comparison to other similar stocks on the market.
Hold - denotes that a stock will move at a similar pace to other comparable stocks on the market.
Outperform - denotes that a stock will perform better than other comparable stocks on the market.
Buy - an analyst’s advice to purchase a particular stock.

Although ratings can be a useful way to determine which stocks to buy and sell, it is important that an investor’s decision to trade a stock is not solely based on an analyst’s rating. Analysts’ ratings can be divergent – one analysts’ prediction about a certain stock may differ greatly from another’s. In addition, analysts may have conflicts of interest, and investors need to be aware of these when assessing the usefulness of a particular rating for their investment decisions.

It is important to make investment decisions based on your personal situation, objectives and strategies. A buy rating does not necessarily mean a trader should purchase a certain security – although this rating may well suit one investor, it could work against the favour of another investor, for whom it would be better to sell that stock. Using a combined approach by conducting your own research as well as monitoring analyst ratings will help you to reach the best decisions you can for your investments.


3. Industry News

News updates regarding a specific industry can sometimes have a domino effect on many companies in the same category. This makes it essential for traders to review industry news headlines regularly – for example, by reading up on news in technology if one has invested in Microsoft shares.

One instance of news affecting share value is the change in CEO of a large corporation. This could either falter or instil confidence in investors and as a result cause market movement of the stocks for that corporation.

Supply and Demand

Stocks are subject to laws of supply and demand. When more stocks are available than are in demand, each share of a company is worth less. So if an institution or wealthy individual sells a large amount of its shares in a particular company, that company’s stock value may see a subsequent decrease – in the short term at least. However, if a company announces that it plans to buy back shares, this indicates that there will be fewer shares available for general purchase in the near future, and may therefore result in that company’s stock price rising.

News of a shortage or high supply of a certain commodity also has the ability to affect many companies within its sector. For example, if there is a shortage of copper, many mining companies may be affected, especially those mining copper, causing subsequent movement in share values.

Occasionally, a piece of news about one company may go on to affect many other companies in the same industry. For example, in 2014, Tesco’s share price fell significantly, but a great deal of its direct competitors in the UK also saw the value of their stock drop. This was partly due to a widespread unease that investors felt about the UK supermarket industry at the time; Tesco’s actions and the subsequent fall-out emphasised the issues within the industry, and brought it to light in the minds of investors.

Other headlines that can shape a firm’s stock price can include company announcements of upcoming changes in strategy, mergers and acquisition rumours and economic news concerning interest rates and inflation.

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