Main Factors that Affect Stock Prices

Multiple factors play a part in determining the price of equities. However, at the core of price movement is the supply and demand dynamics for the stock.

If supply outweighs demand, the stock price will decrease as sellers are forced to reduce their prices to attract buyers. Alternatively, the price increases when demand outweighs supply, as buyers bid higher for a stock to attract sellers.

There is no single predefined equation of factors that move the stock prices, but certain forces play a part in the supply and demand dynamics. These forces are split into three categories fundamental, technical and market sentiment.

Fundamental factors can be split into two categories, internal and external. Internal factors relate to the company itself and move the stock price based on its earnings and profitability. External factors include the broader environment that the company operates in and consider the political, economic, social, legal and environmental aspects, with the economic factors being critical to a company.

Technical factors relate to the company’s historical share price performance and pertain to the analysis of charts, patterns and behaviour of market participants to certain price levels. Stock market participants use this method to predict share prices based on recurring themes and chart patterns.

Market sentiment refers to the market participant’s psychology. The interaction between supply and demand, fundamentals, technical analysis, news and behaviour affects market sentiment. Confidence in the economy, stock, industry and stock market all play a part in determining the market sentiment.



Earnings are the most important factor that affects a company’s value. Earnings refer to the income that a company produces during a given period. These are typically announced every quarter of the year and reflect the company’s financial performance and health.

In the long run, no company can survive without earning an income, and therefore there is a high importance placed on a company’s ability to generate income. If earnings are positive and incremental over the quarters or years, it signals a company’s financial health. It attracts investors to buy a stock, causing a surge in demand and vice versa.

Below is the share price of Capitec Bank Holdings Ltd (JSE: CPI) over four earnings quarters. As shown below, when earnings are positive and better than analyst expectations (Green Vertical Line), the share price surges as investors flock to buy due to its strong performance. On the other hand, when earnings are negative or below expectations (Red Vertical Line), the share price declines as investors sell off on fears of weak performance.

Economic Data

The key factors to consider are inflation and monetary policy (interest rates). Inflationary periods are challenging for listed companies as sales can be subdued due to higher prices which consumers are opposed to.

With the South African Reserve Bank (SARB) committed to price stability, high inflation prompts interest rate increases by the SARB. Higher interest rates increase borrowing costs for companies and can weigh down on a company’s earnings, valuation, and growth prospects. Generally, periods of high interests lead to greater supply, causing stock prices to decline, while periods of low inflation lead to higher demand.

Shown above is the performance of the JSE Top 40 Index (J200) versus South Africa’s Inflation Rate (ZAIRYY) and Interest Rates (ZAINTR). As inflation rose, interest rates surged as the SARB hiked rates to tame inflation. However, the stock market was adversely affected, with the JSE Top 40 Index beginning to lose out in the high inflation and interest rate environment.

Supply and Demand for Other Asset Classes

The stock market as an asset class does not operate in isolation. Various asset classes exist, including Fixed Income, Commodities and money market instruments. The supply and demand dynamics of other asset classes affect the pricing in the stock market.

For example, during periods of high inflation and interest rates, investors tend to become risk-averse and search for investments in safer options. Fixed income and Gold become more attractive in these periods and attract more significant capital at the expense of stocks. Therefore, stock prices decrease as supply increases while demand for safer asset classes picks up.

Below is the performance of the South African 10-year Government Bond Yield versus the JSE Top 40 Index (J200). As yields rose, the stock market prices declined, reflecting the negative correlation between high-interest rates and the stock market.

Currency Strength

The rand’s strength can also play a significant role in determining the price of stocks. When the rand strengthens, foreign investors find it more expensive to convert their home currency into rands. As a result, this deters investment in the country. At the same time, investors already knee-deep in South African stocks tend to find a stronger rand as the perfect opportunity to sell South African stocks for some gains.

Below is the JSE Top 40 Index (J200) performance versus the ZARUSD currency pair. As illustrated below, when the South African rand weakens, the JSE top 40 index performs much stronger as foreign investors find it cheaper to buy South African stocks.


Support and Resistance

Support refers to an area on a price chart that act as a barrier where the share price tends to stay above or fails to break below, while resistance is where the price tends to remain below or fails to break above. Support and resistance act as demand and supply zones and could be used by investors.

In the example below, FirstRand Ltd (JSE: FSR) established support and resistance at the 7184 and 5938 per share levels, respectively. When the price reached support, investors viewed the area as one where demand outweighed supply, and the share price moved higher, while resistance acted as an area where supply outweighed demand, causing FirstRand’s share price to move lower.

Market Sentiment

The herd mentality refers to a phenomenon where individuals copy and follow the crowd or what other investors are doing. These types of investors are usually influenced by emotion and jump onto any stock trending either up or down. As more and more herd investors pile into the market, the stock price tends to continue moving in the direction of the trend.


Stock prices tend to move due to a cocktail of factors. Investors are best placed to know the multiple facets and act on them as and when they appear in the markets.

Sources: Corporate Finance Institute, ShareData, StatsSA, TradingView

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