QS Study

Causes of Price Fluctuation in Stock Exchange

Share business is often called gambling. Actually, it is not true but the price of share often fluctuating. The price of share always fluctuates with and without arguments. Its price of the share is on the basis of demand and supply of the shares. But the rate of change price level of shares is much faster than that of products in the market. There are many causes of fluctuating share price except demand and supply. The possible causes of price fluctuation of shares are discussed below:

Demand and Supply: The update on demand and supply is the main reason for price fluctuation. If the supply of share is lower than the market demand, the price of such shares goes high. On the other hand, if the supply exceeds the market demand, the price falls. So, price mechanism works here as like product market.

Financial Condition of the firm: Financial condition of a company affects massively the price of that in the market. If the condition is better more and more investors are willing to invest in that company and thus the price of the shares of that company goes high. On the other hand, if the condition is not good, the investors switch the company, and they leave the share in the market. So, the price of the share of that company goes down.

Bank rate: Credit policy of central bank affects the share price. If the central bank raises the bank rate, the rate of the commercial bank on loan will also be high. Thus less amount of loan will be disbursed. So, fewer people will be willing to invest in the stock market. Then the price of the share will fall. On the other hand, if the central bank rate is less, the entire loan flows fast and more investors invest in the stock market. So, the share price will high.

The rate of dividend: If a company declares a high dividend rate the demand for shares of that company is high. More and more investors are willing to invest in that company and the demand for shares of that company goes high and ultimately price level will also increase. Reversely, if the dividend rate is not satisfactory, the share price will also be lower because the investors will sell the shares kept in their custody.

Influence of trade cycle: The economic cycle also affects the shares price level. If the trade is going well, the money circulation is also well and more people will interest to invest in share market. Thus the share price will increase. On the other hand, if the economic condition of a country is not good and even recession, the share price will fall.

Activities of speculators: Speculators also influence the price level of a stock exchange. They may stock a huge amount of shares to create the artificial shortage. And when the price of share due to the shortage, will increase, then the speculators will sell those shares. Speculators affect the share price in a considerable portion.

Credit policy of the central bank: Central bank controls the money flow in a country. If it takes liberal polio to increase money flow among the general people, the more and more people are willing to invest, the price of shares is also high. On the other hand, it the central bank takes a conservative policy that lessens the money flow, the general people, due to lack of money will not invest anymore.

Inflation and deflation: Inflation causes more money circulation in a country. When more money is in the hand of households, they are willing to invest more in the stock market Thus the price of a share is increased. But if deflation occurs, the general people are less willing to invest due to lack of money circulation. So, the price of shares is also falling. The Government can also influence the price of shares by controlling the inflation and deflation rate.

Political condition: Political condition is another powerful price influencing factor. If the political condition of a country is turbulent, the investors are frightened in investment. So they do not invest anymore and the prices go down. But if the political condition is peaceful and calm, the more investors are willing to invest, and the foreign investment will also come, thus the share price will rise.

International situation: Nowadays the world is a global village. Every country is dependent, in any way, on other countries for capital, technology, raw material, labor force, land, market etc. So in case of unrest in any country’ affect the other countries will also be affected. In this case, any economic recession occurs in a country, it affects the share price of another country. For example, after the attack of Twin Tower in the USA, the share price all over the world was negatively affected.

Government’s role: Government also has influential power on stock prices. When govt. takes steps to increase investment, whether it invests or raise capital from the general mass, and the share price goes higher. On the other extreme, if govt. considers any industry or to discourage, the share price falls and people leave the shares of that industry.

Besides the above factors, stock price also is affected by many causes. Law and order situation, war and peace, social and religious view toward it, govt. policy, taxation, economic and fiscal policy, industrial policy, budget, trade unions, and geographic conditions also influence the price fluctuations of the stock exchange.