Why do prices of securities traded on a stock exchange fluctuate widely and frequently? Discuss the, causes briefly.
Prices of securities especially equity sharer fluctuate very critically. Buying and selling activities of speculators is the main reason for the changes it price.
Cause of fluctuation are stated below :
Interest rate: Speculative activities an security prices change, if rate of interest charged or loans and overdrafts by banks is changed. People, get motivated to borrow money from banks and can profit by engaging themselves in speculative activities, if they get credit at lower interest rate from banks. Speculative buying may raise the security prices. If banks offer credit at higher rate, borrowing will be reduced and security prices will go down because demand for securities will be lowered.
Activities of financial institutions: Price general!v shoot up when financial institutions star purchasing securities on a large scale. It is so because it arises the expectation of the people about the company’s prospects and the demand also rises. Prices get lowered down, if financial institutions sell off the securities on a large scale.
Political events: Prices of securities change due to changes in international relations and composition of government, conflicts and political upheavals and war between nations. It is so because political events to a great extent affect the business and industry conditions.
Changes in Board of Directors: With the changes in Board of Directors of particular companies, security prices also change. Doubt or apprehension may be caused about future prospects of the concerned company, if a well known director dies or resigns. In that case, price of shares of that company may get effected adversely.
Performance of the company: The company’s prospects regarding future profits and dividend payments are reflected in rising or falling of its shares_ Profits and dividend rates help in the investors to know about the return rate on investment and future rise in prices. The demand for shares and prices increase, if the prospects are good. The demand for shares and prices decrease, if the performance of a company reveals an unsatisfactory trend.
Business cycles: Prosperity and depression greatly affect the conditions of business. At the time of prosperity, security prices go on rising because bull speculators are active during prosperity and go on purchasing securities. They are forced to bargain for sale, if due to shortage of funds they are not able to meet their liabilities. In this case, prices reducer rapidly and market faces a state of depression.
Sympathetic fluctuation: Security prices often change because of changes in another exchange, if prices are traded in more than one stock exchange. Because of immediate communication among speculators, if security prices in one stock exchange fall, it leads to fall in prices of same securities in other exchanges too.
Changes in government policy: Security prices change with the changes in government policy regarding taxation, price controls, import-export etc. Changes in government policies have become a major cause for rising and falling of prices of shares. Share prices shoot up, if dividends are exempted from income tax by the government. If income tax rates are increased on company profits by the , government, the prices may fall.
Various other factors: Security prices are also affected by various other factors like psychological reaction of speculators which may not be related with stock exchanges directly. For example a lockout for a long period may cause fall in the prices of shares or illness of a powerful head of government may cause fall in security prices.