Nothing can tell us how a particular stock price will behave with complete certainty. It could move up or down at any given moment, affecting your investment strategy. However, there are undoubtedly several factors that contribute to its movement, and they aren’t all as straightforward as you might think. Before you decide to invest in new stocks, take a moment to understand the following influential factors.
In recent years, among the more surprising influencing factors has been fundamental and alternative data. For example, if you were to look at Tesla stock analysis with alternative data, you might notice that a wide variety of non-technical factors influence their stock prices.
Alternative Data That May Influence Stock Prices
- Traffic to their website
- Historical trends of their mobile app downloads
- Social media
- Google Trends
- Search results
- Insider trading
- Employee numbers
Individually, these factors may not influence Tesla stock prices or even the company’s popularity, but collectively, they may paint a picture of the direction a particular company is heading in and allow you to make stock purchasing decisions accordingly.
Technical factors refer to external conditions affecting the supply and demand of a company’s stocks. There are many different technical factors to consider, such as inflation, the economic strength of the sector or industry, demographics, incidental transactions, and more.
Low inflation has been known to drive high multiples, while high inflation can drive low multiples. In contrast, deflation reflects a reduction in a company’s pricing power.
When you’re basing your stock purchasing decisions on a company’s performance, it never hurts to also look at the economic strength of that company’s peers and the market as a whole. Often, investors base their decisions on an overall sector’s performance rather than just the individual.
Surprisingly, demographics are also a technical factor that can influence stock prices, even if just subtly. There tend to be two dynamics: middle-aged investors and older investors. Middle-aged investors have peaked in their earnings and decided to invest in the stock market. However, older investors will pull out of the market as retirement approaches.
The more middle-aged investors there are in the general investor pool, the higher the demand for equities there may be, and the higher the valuation multiples.
The fundamentals affecting stock prices are generally an earnings base and a valuation multiple. The earnings base can be earnings per share (EPS), which is a stock owner’s return on investment. A valuation multiple, like a P/E ratio, is how much you’ll pay for future earnings.
Essentially, the valuation multiple outlines future expectations and is based on the earning base’s expected growth and the discount rate that calculates the present value. The discount rate is determined by the perceived risk of the stock, inflation, and possibly even interest rates.
The higher the inflation rate, the higher the discount rate, and the lower the multiple. This can mean that your future earnings may be worth less.
When you invest in stocks, you’re not investing in a sure thing. However, there are ways to gain insight into expected outcomes. By looking at alternative data, the technical factors, and fundamentals, you may be able to make wise stock purchasing decisions that serve you well in the future.
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