Internal and external factors affecting share price

Written by james green
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Internal and external factors affecting share price
The factors affecting share prices can be both internal and external. (Comstock/Comstock/Getty Images)

The change in a price of a share may be a result of a variety of factors. These factors may be both internal and external. Internal factors are those that are directly a result of a firm's actions, and are often linked to firm profitability. External factors are those that are not in control of the firm, and may include market speculation and investor confidence.

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Internal Factor: Dividends

Internal factors affecting share prices may include the profitability of a firm. If a certain share pays dividends to investors, share price will increase if dividends increase. Dividends tend to be linked to a firm's profitability, and firms that are more profitable tend to be valued higher. With other things being equal, a higher-valued company will have higher-valued shares. The price of a share may increase with value, as its returns are better.

Internal Factor: Share Bonuses

Some companies, instead of paying dividends, may pay share bonuses instead. Instead of a cash payment, more shares are issued. The more shares a company issues, the lower the value of its shares. Increased share bonuses may lead to a fall in share price. Thus, although a firm may see more profits and see its value increase, the price and value per share may not necessarily increase.

External Factor: Market Trends

External factors are those that a company has no control over. The stock market is highly speculative in nature, and such speculation is a result of public trading. Public trading is governed by the rules of supply and demand. Increased demand in a certain stock will increase the price demanded for it. Therefore, if there is an increased level of buying in a certain stock, its price will go up. If there is an increased level of selling, its price will go down. Over-speculation may lead to stock market bubbles, where the price of a share is higher than its value.

External Factor: Investor Confidence

The state of the economy has a large impact on the patterns of share trading. The media often reports on expectations of market behaviour and economic climate. If the expectations of the future are good, then the profitability of firms and corporations is expected to be more positive than negative. This in turn increases the buying of company shares, which in turn increases price.

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