Back in the Springs of the year 1720, Sir Issac Newton made a 100% profit from his investments in a profitable company called The South Sea company. Massive demand for this stock led to dramatically high prices before collapsing. (Newton personally lost about a 3-4 Million Dollar in today’s money worth)
From this little excerpt, we find some factors affecting the prices in the stock market. We all know equilibrium prices is the intersection of Demand and Supply. Market prices change when the expectations of the buyers and sellers change. The reason for this ‘Market Expectations’ can be rooted in only the profitability of a company and news which affect the company directly or indirectly.
One can interpret profitability by looking at ‘Earnings per Share’ which is Net profit divided by Number of shares.i.e, how much portion of profit an investor like you and me would get from the company per share. Higher the better. A change in the trajectory of EPS can result in changes in market prices.
Another factor affecting prices is news. Think of the situation where a company announces higher profit. But at the same time, if the biggest bank of your country defaults on its depositors, that would probably crash the market. News is like a devil’s instrument for instantaneous profits or significant losses. It directs the heard behaviour of the market.