STOCK PRICES - An Economic Indicator

The stock prices of a company are determined by supply and demand. Supply is number of shares a company has issued and demand is the want/need of people to buy those shares from investors who own them. If more people want to buy the stock than sell it, then the price shoots up. Supply of stock is limited and hence now to be able to buy a stock, someone has to sell the stock. But if the people are not ready to sell the stocks at the current prices, then the prices rise and keep rising until the tendency to sell the stock comes. When the price goes very high that a buyer no longer wants to posses the stock, the price starts falling.

On the other hand if the supply(selling) increases than demand(buying), the price of stock falls. Beyond the factor of mere demand supply chain in the stock market, the price of the stock is majorly influenced by the earnings of the company. Earnings of a company are the profit/loss the company earns at the end of a financial year. A good high earning for the company (i.e.profits), breaking the estimates of the analysts, the stock prices of the company rises.


Also, prediction of a company's earnings in the near future can influence the stock prices. Rise in the earnings in the future could increase the price of stocks and vice-versa. A company future earnings growth/fall is determined through P/E Ratio by the investors.


             P/E Ratio = Market Value per Share / Earnings per Share (EPS)



Higher P/E suggests growth in the earnings of the company than a company with low P/E.


Indicators of an economy are the ones that undergo changes before the entire economy changes. Stock markets have been the leading indicator of future economy of the nation. Decline in stock market indicates a low economy in the future, whereas, rising stock markets promise a growing/recovering economy. Fall in the stock prices indicate that the business is making less money, rise in unemployment, and fall in the purchasing power of the public leading us towards an economic downfall in the nation.