In the earlier blog post, I presented a graphical representation of factors affecting share price of a stock.
The share price of stock is dependent on several factors starting with:
one: company specific data and outlook
two: industry specific information and outlook (company belonging to that industry, e.g aviation industry, oil & gas, etc)
three: government policies affecting the industry (e.g. property curbing measures, foreign workers quota, etc)
four: economic growth outlook of countries that the company has operations in
five: monetary policy of central banks (US, EU, China, Japan, Singapore, etc)
six: fiscal (or budget) policies of the Singapore government (e.g money going to specific industries, corporate tax revision, GST revision, etc)
The above factors are concrete and measurable in that they can be worked into the share price movement equation. The factor that is less measurable is the investors’ behaviour during daily trading. We could see irrational exuberance in share prices going sky-high (e.g. dot-com bubble of 2001) or downright panic selling in share prices reaching the floor (e.g. global financial crisis of 2008/9).
Interest rates in monetary policies
In the world of finance, interest rate is the most important element in valuation of stocks, bonds and projects. Interest rate is used by almost all central banks in their monetary policies. Interest rate affects the cost of funds for investors investing in equities, bonds, properties. etc. Interest rate also affects businesses in their operations, acquisition of assets and project financing.
That is why, the business community and investors are fixated on when and how fast is the US going to hike interest rate. The current loose monetary policy of China (with few rounds of reductions in interest rates by PBOC, with the latest announced on Saturday 27 June 2015) had resulted in the China stock market running up so fast in the one-year period. As long as the cost of borrowing is low, the risk appetite of investors rises to take advantage of low cost of funds.
When investing, it is best to stay with known information and it pays to do some homework and look at the various factors affecting share prices. This is easier said than done. Information is not readily available to retail investors. We only get to know some company specific information much later in the news of the following day. That is the reality. The least we can do is to analyse more data points before we sink money into a particular stock.
Copyright © 2015, limkimtong for Living Investment
The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.