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Rise and fall of the stock market: What influences share price?

28/02/2019

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To the untrained eye – and quite often to the trained eye as well – the stock market can look like one great big casino. You spin the wheel, prices move up and down, and lives and livelihoods are changed beyond belief. Sometimes, apparently great companies with great products see their share prices drop, sometimes bad companies do the opposite. Is there any logic at all in the movement of company shares?

Certainly, anyone who tells you they know for sure that a share price is going to rise or fall can comfortably be ignored. They don’t. However, there are certain things that influence share prices over the longer term, and you can give yourself a fighting chance of picking better investments by knowing what they are.

 

1. The fundamentals

Shares are just tiny little chunks of a company. Therefore an important part of how share prices behave is the performance of the company itself. Is it selling more of its products? Is it making more profit from those sales? And to what extent is it passing on those profits to its shareholders via dividends?

Investors may also ask themselves whether the company is run by a strong and capable management team; whether there are any big risks looming that might derail the company; and whether it takes care of its employees. All these can help build a picture of whether a company is likely to grow its profits in future.

There are various metrics to measure these ‘fundamental’ aspects of a company’s strength. For example, an investor might look at revenue growth – how much the company has grown its gross income over the past 12 months. The fund manager’s favourite is a calculation called ‘EBITDA’ (or ‘earnings before interest, depreciation and amortisation'). This, alongside earnings per share, is a way of demonstrating how quickly a company is growing.
Revenues shouldn’t be looked at in isolation, as it is possible to sell lots of products and make little profit. Instead, investors should look at revenue alongside profitability and cashflow. Dividends can also be an indication of a strong company – if a company is generating enough cash to pay dividends to shareholders that is generally a positive sign.

 

2. Perspective on the day

The share price of a company also reflects investor expectations. A company could be selling lots of products and growing its revenues at 50-100%, but if most investors know that, it will be reflected in the share price today. Therefore, continuing to grow earnings at 50-100% won’t push the share price higher tomorrow, as it’s already accounted for.

However, if a company is expected to grow at 50% but suddenly grows at 25%, investors are likely to conclude that it isn’t worth the current share price and sell out. The share price will drop as a result. In contrast, if a company is expected to do badly, and does less badly, then the price may rise. In this way, apparently good companies may do badly in terms of share price, and bad companies may do well.

In judging this, investors often look at the ‘price to earnings’ ratio. This tells an investor how much the market is willing to pay per £1 of company earnings. It’s calculated by taking the share price and dividing it by the earnings per share. If a company is trading on a P/E of 20, it means investors are paying £20 for £1 of profits. If the share price doubles, but earnings stay the same, the P/E would be 40, which doesn’t look quite such good value.

 

3. Wider world around us

In the long-run, share prices should ebb and flow with the fortunes of individual companies. However, those fortunes are influenced by what is going on in the wider world. If the US economy is deteriorating, that can mean companies will struggle to sell as many goods and services to American consumers. This is being seen in the UK at the moment: the share prices of UK retailers have been under pressure because investors believe Brexit may influence spending habits. This may or may not be true, but no-one wants to take the risk.

The problem is that stock markets are prone to seeing more risks than there are in reality, and this accounts for a lot of the volatility in markets. Investors panic about Chinese manufacturing, or Donald Trump’s access to the nuclear codes, and markets sell off. Often these factors don’t end up affecting the profits of, say, Unilever very much at all and the share price recovers, but it can be painful in the interim.

 

What should investors conclude from this? Laith Khalaf, senior research analyst at Hargreaves Lansdown, says:

“Valuing a share is not an exact science, and investors need to look at financial metrics but also consider the wider prospects for the company and the sector it sits in. If you’re investing in individual shares you’ll inevitably pick some losers as well as winners, which is why you should keep a diversified portfolio so all your eggs aren’t in one basket.”

We couldn’t say it better ourselves.

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  • I have about two thirds of my ISA in funds with Charles Stanley Direct and about one third left with St James's Place. I was planning to transfer the remaining one third to Charles Stanley Direct. However the recent platform price increases seem to put me in the worst position possible. I also have a private St James's Place pension. Would I be correct in thinking the fees are also high on this, and I could do better elsewhere? Can I transfer into an SIPP for example?

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    Holly Mackay's Response

  • I'm 24 and would like to begin investing. Am I better off using a robo advisor such as Wealthify/Wealthsimple or a fund such as Vanguard LifeStrategy?

    Amanda | Greater London | 06/08/2018 | 6

    • Shares
    • Robo Adviser
    • Online Investment Platforms
    Holly Mackay's Response

  • I have cash saved in ISAs and savings accounts - probably a 30% deposit on a property - first time buyer. I am at least 12 months away from getting a permanent job, so at least 12 months away from buying a property. What can I do with the cash in the meantime? Best just to leave it in cash for now, or invest a portion in stocks and shares ISAs?

    Malti | London | 25/07/2018 | 2

    • Stocks and Shares ISA
    • Lifetime ISA
    • Cash
    Holly Mackay's Response

  • I am 73 and cautious. There are two areas that your advice would be helpful..what if you just spend thousands on buying the gold standard footsie companies like shell and the rest and keep them for five years and then cash them in ?

    DB | UK | 24/07/2018 | 6

    • Robo Adviser
    • Online Investment Platforms
    • Funds
    • Pension
    Holly's Response

  • I'm nearly 30 and looking to open a private ready made pension, and also an investment ISA for retirement funds or towards a property, but very unsure what risk level to choose (low to medium, or medium to high)? Any comments or advice welcome.

    Susan | WMD | 24/07/2018 | 1

    • Private Pension
    • Stocks and Shares ISA
    Cherry Reynard's Response

  • Nutmeg require a minimum investment of £5,000. As I have less than £5,000 per annum income I am a bit confused about how much I can put into a pension. I know the government will only gross up a maximum of £2,880 per year but can I put more than this in and forgo the gross up?

    Barbara | HRT | 10/07/2018 | 1

    • Robo Adviser
    Richard Allum, MD, The Paraplanners's Response

  • I hope you can help. I recently consolidated two modest pensions into a SIPP in readiness to start UPFLS drawdown in May (2018). Whilst I was hoping for growth in my investments I wasn’t expecting it to rocket and now find I could well be looking at exceeding the lifetime allowance, possibly even before my first annual drawdown in May, and I’m unsure what, if anything, I should do.

    John | LDN | 03/07/2018 | 1

    • Private Pension
    • Funds
    Richard Allum, MD of The Paraplanners's Response

  • What are the differences between income and accumulation income funds? How do you declare income reinvested in a fund on your tax return?

    C | 05/06/2018 | 0

    • Funds
    Helena Wardle's Response

  • We have a portfolio of ISAs/ PEPs worth around £250k, currently invested via Cofunds, managed by Chelsea and Bestinvest. I'm told this is quite an expensive option regarding platform charges. Are there better options?

    John | BRK | 08/05/2018 | 6

    • Robo Adviser
    • Online Investment Platforms
    Helena Wardle, Certified Financial Planner's Response

  • I would like to open a Junior shares ISA for my Grandson for about £50/month. How do I go about it and can you recommend some reliable companies?

    Roger | Surrey | 26/04/2018 | 2

    • Junior ISA
    • Shares
    Founder and CEO's Response

  • Can you recommend some very basic books for a 69-year-old widow who is now having to manage her money? Thanks

    Martha | 12/04/2018 | 0

    • Shares
    • Funds
    Helena Wardle, Chartered Financial Planner, Sterling and Law's Response

  • I just found your web site (recommended in Andy Bell's book on Do It Yourself investing). Could you say why you do not review Halifax Share Dealing in your list of ISA providers? Is there anything wrong with this ISA provider for you not to include it?

    Gerald | 11/04/2018 | 0

    • Shares
    Dr Richard Bradley's Response

  • Hi, I've got an old D.B. pension, approximate value £12k. I would like to invest & top up each month. Who would you recommend? Also I would like to make an investment, & don't know where to start? Thanks

    Eve | 04/04/2018 | 5

    • Funds
    • Pension
    Helena Wardle's Response

  • I am post-divorce with a good settlement which I have only partially invested. Are there any courses you can recommend? I have sat in a number of meetings with accountants and financial advisers feeling somewhat patronised! I am sure that there are plenty of women in a similar position to me (aged 55!).

    Ellie | 14/03/2018 | 3

    • Shares
    • Funds
    • GIA
    Holly Mackay's Response

  • How can I find a good financial adviser?

    Byron | Greater London | 01/03/2018 | 0

    • Shares
    • Funds
    Holly Mackay's Response

  • I am in the very lucky position of just having received a gift of £800k which I want to invest for our retirement. My husband and I are in our late 40s and aim to retire in around five years. We have 11 more years of school fees to fund, then hopefully university fees for two after that. I've put together a plan for us - can you have a look and see if it makes sense?

    Fiona | UK | 18/01/2018 | 6

    • Private Pension
    • Stocks and Shares ISA
    • Junior ISA
    • Shares
    • Cash
    • Online Investment Platforms
    Holly Mackay's Response

  • We have four grandchildren (2 English living in UK, and 2 Irish living in Eire). We have decided to start savings plans for their futures. Their ages are 18yrs, 11yrs, 8yrs and 4yrs respectively. My age is 75yrs, and my wife is a little older. What should we do, please?

    John | BKM | 01/01/2018 | 1

    • Junior ISA
    • Lifetime ISA
    • Shares
    • Funds
    Martin's Response

  • Given the recent poor performance in Woodford Equity Income, do you think I should sell it or wait for the fund to recover?

    Jenna | Cornwall | 17/12/2017 | 3

    • Funds
    Mark Dampier's Response

  • I am already receiving a pension from a final salary scheme and I am retired. I have a sum of money I want to invest. Can I start another pension as a saver and, if so, how much can I put in every year?

    Collette | Greater London | 25/11/2017 | 0

    • Private Pension
    • Online Investment Platforms
    Danny Cox's Response

  • How do I start investing, buy stocks, bitcoins, etc with £100.00?

    Claudette | BDF | 18/11/2017 | 1

    • Shares
    • Other
    Holly Mackay's Response

  • I am a 59 yr old retired lady with no income but I have reasonable equity..is it worth starting a pension or is it too late?

    LL | NFK | 10/11/2017 | 2

    • Private Pension
    • Shares
    • Pension
    Cherry Reynard's Response

  • I am getting long in the tooth at 79, a little forgetful and I am going through a painful divorce. This has shattered my confidence and I need help.

    Richard | Kent | 05/11/2017 | 3

    • Private Pension
    • Funds
    Holly Mackay's Response

  • Have you a review on Halifax stocks and shares isa

    Moira | LDN | 21/10/2017 | 5

    • Stocks and Shares ISA
    Dr Richard Bradley's Response

  • My mother is 84 and has around £35,000 in cash, realised when she moved to a smaller house. She would like to invest it and draw income that would be slightly higher than the natural yield - say around £2,000. What is the best vehicle for that please?

    Ed | SXE | 18/09/2017 | 4

    • Stocks and Shares ISA
    • Cash
    Danny Cox's Response

  • I have just sold my house and have a significant sum of money I want to invest. I may want to draw some income but also want to achieve capital growth. Are there funds that aim to achieve both or should I just invest for growth and draw money as I need to for income?

    Jon | SRY | 13/09/2017 | 1

    • Funds
    Peter Matthew's Response

  • I have a delightful 12 year old daughter and she has just opened her first bank account. I am dreadful with money but I would like to know what I should teach her so that she does not pick up my bad financial habits. Do you have some top tips of things to teach our children so they are wise and responsible with money please?

    Louise | Greater London | 11/09/2017 | 1

    • Junior ISA
    • Shares
    • Cash
    Lesley James's Response

  • I am interested in the Fund piece that Holly refers to in today's Money Supplement in the ST’s with 'Lindsell Train Global Equity'. I am looking for a fund for myself (54 yrs old) but also my son (19 yrs old). Is this fund suitable for either of us with an investment strategy of 10 years +.

    Richard | 22/01/2017 | 0

    • Funds
    Holly Mackay's Response

  • I am confused about index funds, e.g. Vanguard Equity fund. Do they track an index or include the yield? In the case of Vanguard, their low cost is attractive but their portfolio is made up of other Vanguard funds. I assume these probably each carry a fee structure - is this correct?

    Robin | Gloucestershire | 03/09/2018 | 0

    • Online Investment Platforms
    • Funds
    Mark Dampier's Response

  • Is it worth using a financial adviser when it comes to switching pensions funds, or should I do the research and pick the funds myself? I am no expert in stocks and shares.

    Helen | Dorset | 10/08/2018 | 4

    • Private Pension
    • Shares
    • Funds
    Helena Wardle's Response

  • I've got £20,000 from an endowment policy (astonishing, I know), and I'm looking into how best to invest to get a reasonable return without excessive risk. Any thoughts much appreciated!!

    Penny | Peterborough | 09/08/2018 | 1

    • Stocks and Shares ISA
    • Cash
    • Online Investment Platforms
    • Life Insurance
    Danny Cox's Response

  • I am looking for a fund for myself (54 yrs old) but also my son (19 yrs old). Is this fund suitable for either of us with an investment strategy of 10 years +.

    | 29/05/2018 | 3

    • Robo Adviser
    • Funds
    Holly Mackay's Response

  • I use H&L and although they are a bit 'plumy' on the phone I quite like their website and the costs are OK. So I was thinking of H&L for [my son]. I would be telling him to open these two funds and regularly invest and forget about them for 10 years!

    R | Greater London | 29/05/2018 | 1

    • Lifetime ISA
    • Robo Adviser
    • Online Investment Platforms
    • Funds
    Holly Mackay's Response

  • Given the recent poor performance in Woodford Equity Income, do you think I should sell it or wait for the fund to recover?

    | 29/05/2018 | 2

    • Funds
    Boring Money's Response

  • I have a bit of excess money to play around with and I have been looking at Investment funds. What is the typical % growth rate of an investment fund?

    David | Greater London | 07/09/2017 | 7

    • Online Investment Platforms
    • Funds
    Cherry Reynard's Response

  • How risky is a Stocks and Shares ISA?

    Alexandra | Greater London | 06/09/2017 | 2

    • Stocks and Shares ISA
    Holly Mackay's Response

  • Should I be even thinking about the stock market?

    Lysa | Greater London | 06/09/2017 | 0

    • Stocks and Shares ISA
    • Shares
    Holly Mackay's Response

  • Pensions vs ISA - which one is best?

    Roderick | Greater London | 06/09/2017 | 0

    • Stocks and Shares ISA
    • Junior ISA
    • Lifetime ISA
    • Pension
    Holly Mackay's Response

  • What funds could my millennial children invest in?

    Anthony | Greater London | 06/09/2017 | 2

    • Funds
    Holly Mackay's Response