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Changes in Stock Prices and Market Fluctuations

Outline

  • Introduction
  • Changes in Stock Prices in General
  • Profitability
  • Liquidity
  • Solvency
  • Recommendations

Introduction

The changes in the stock prices are originally caused by numerous factors and may cause essential changes in the marketing strategies and the approaches towards business activity. The aim of the paper is to analyze the reasons and consequences of the stock price changes. The fact is that, these are closely associated with profitability, liquidity and solvency factors. All the factors will be taken into consideration, moreover, the changes of the stock prices will be evaluated in the context of market fluctuations, modification of marketing trends and the role of the market stock price for the marketing strategy.

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The importance of the paper is covered in the notion that the modification of the stock price significantly influences the marketing tendencies and the attitude of the market players towards the specified production or service. On the other hand, the factors, which influence the changes of the stock prices should be taken into consideration by managers and financial analysts for creating and analyzing the marketing strategies, evaluating the reasons and consequences of the marketing events for the further processes and tendencies.

Changes in Stock Prices in General

To begin with, there is strong necessity to give the brief explanation of the main reasons, why the stock market prices change. Originally, these changes are explained by the changes of the combinations of market forces, which are presupposed by the modification in supply and demand. Thus, if the amount of people who wish to buy some products or services is larger than the amount of people who sell these products or services, the price increases. And vice versa, if the sellers are more numerous, the price decreases. Thus, the amount of the stock, provided for the market defines the stock price. On the one hand, these tendencies and processes are clear for understanding and application, on the other hand, the reasons, explaining why people prefer buying of selling some products or services is hard to understand, and requires deeper research.

Originally, the economy and the stock market are closely related to each other. Lots of researchers prefer studying the stock market tendencies for applying them for understanding the tendencies of economy. Thus, is accordance with the research held by Baumol (2004, p.351) it should be stated that if the stock market is in its decline phase, the economy can not progress:

However there is little evidence that the stock market causes the economy to rise or fall. The stock market does not directly affect the economy. It is simply a mirror of people’s generally correct beliefs about what is about to happen in the economy. The best way to understand this is to realize that a stock market index the Dow Jones Industrial Average (DJI) is simply a price. Because the value of index is a price, it only has two determinants: supply and demand.

Sometimes the changes of the market stock prices are associated with the processes of recession. Thus, in accordance with the previously regarded principles, it should be emphasized that when the new stock is issued by any organization, the decline of the stock price should be observed. However, if the stock prices are defined by the supply of stocks, and the declines of the stock are closely linked with the economic declines, the flood of new products and services should be observed before the recession starts (Haney, 2001). Nevertheless, this is not observed in practice, while the new growth periods of the economy are featured with the appearing of new stock issues. Originally, this is explained by the fact that money, earned with the assistance of the stock issue, is generally applied for the increase of the company’s output, which causes economic growth to rise.

Profitability

As for the matters of profitability and effectiveness of the marketing activity, it should be emphasized that these issues influence the stock market price essentially. Nevertheless, these issues are deeper than the matters of supply and demand. On the one hand, profitability is the factor which depends on the market price directly, thus, the companies should tend to increase the market price, nevertheless, in order to attract consumers, the price should be decreased. And the more consumers will be attracted, the larger profits will be gained. Thus, profitability is generally regarded as the double end stick.

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The tendencies and processes, which explain these matters, are associated with the business shares, investments, and business information in general. Thus, the stock of any business is divided into specific shares. Originally, the amount of shares is stated in the moment of business organization and launch. Basing on this consideration, Eagle (2004, p.245) emphasizes the following notion:

Given the total amount of money invested into the business, a share has a certain declared face value, commonly known as the par value of a share. The par value is the minimal amount of money that a business may issue and sell shares for in many jurisdictions and it is the value represented as capital in the accounting of the business. In other jurisdictions, however, shares may not have an associated par value at all. Such stock is often called non-par stock. Shares represent a fraction of ownership in a business.

The factor of profitability is also associated with ownership of the shares. Taking into consideration that such ownership is supported by stock certificates, which, originally, define the sizes of shares, and their amount. Anyway, the factors of supply and demand stay the key determinants of the market stock prices changes. The supply at some particular moment is defined by the rates of demand at the same moment, which is the matter of sales volumes. As demand is regarded to be the number of the investors or consumers of some particular product or services. In the light of this fact, it should be stated that the price of the stock changes in order to maintain the equilibrium of demand and supply. As for the matters of profitability (Munnell and Steven, 2006) emphasizes that it depends on this equilibrium: The closer demand supply balance is to the equilibrium, the more stable profitability is achieved.

Ma (2006) in his turn emphasizes that when the consumers outnumber sellers and service providers, it should be emphasized that the price increases, and the profitability levels tend to increase as well. In these circumstances the sellers, attracted by the high prices of the services or products wish to penetrate the market, and consumers leave it because of the same reason. Thus, the equilibrium changes, the profitability falls, and the stock prices should be increased, in order to improve the profitability characteristics of the market sphere, and restore he necessary equilibrium.

Liquidity

Another factor which influences the stock market price is the liquidity of the goods, represented on the market. The fact is that, liquidity is another matter of supply and demand equilibrium, as liquidity is defined by the changes in demand and supply, and how these matters influence the price of the products or services. In this context, it should be emphasized that the common value of the market share is generally defined by the capital inflows, which is provided by the consumers (which are the key factor of demand), and the manufacturers (providers) of goods (services), which are responsible for supply. If the stock is highly invested, the price will be increasing, and vice versa. From this point of view, there is strong necessity to give the consideration, provided by Raines and Charles (2002, p. 194):

In professional investment circles the efficient market hypothesis (EMH) continues to be popular, although this theory is widely discredited in academic and professional circles. Consequently, that share prices of equities are priced efficiently, which is to say that they represent accurately the expected value of the stock, as best it can be known at a given moment. In other words, prices are the result of discounting expected future cash flows.

From this perspective the liquidity of demand and supply factors defines the changes of the market stock price in accordance with the rules of the Behavioral Finance theory. It states that humans often make irrational decisions, especially those, which are associated with the consuming habits, purchasing behavior and securities linked with the matters of quality. This irrational behavior often causes the changes in liquidity of the marketing trends, thus originating the fundamental price variations.

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Another concept of liquidity and price stock changes relation is associated with the matters of marketing periods and the measures of liquidity. Originally, some delays are often observed in the matters of market’s reaction for the changes in the original circumstances. The fact is that, these delays are presupposed by the large scales of the market penetration, and the necessity of suppliers and consumers adapt to the new circumstances. If the reactions for the changes were instant, the violations of the equilibrium would be minor. Nevertheless, when the adaptation is completed, the circumstances have already modified, and new adaptation is required (originally, this is the fundamental principle of marketing), thus, the stock prices are changed in accordance with the rules and principles of marketing basics.

Solvency

Solvency is the final factor, which influences the changes in the sphere of market stock prices. Originally, solvency is defined by the marketing price of the goods and services. The price is dependent on the matters of projected profitability, while the profitability is defined by the equilibrium of the supply and demand factors. In the light of this fact there is strong necessity to emphasize that is the solvency of consumers is high enough, the stock price may be increased, or left at the same level. Taking into consideration the necessity to keep the balance, the market players will decrease the price, if the solvency of the target audience is not high enough for purchasing the offered goods or services. The liabilities, associated with the solvency, are generally imposed on manufacturers and service providers, as the consumers vote with their own money for the quality of the provided goods. Haney (2001, p.320) emphasizes the following tendency in this sphere:

In order to meet their current annuity liabilities, most market actors tend to invest in corporate bonds with a range of default ratings. If annuity liabilities are valued with a risk-free rate of interest then insurers will have to choose between investing in government bonds, such as gilts, which are likely to provide lower yields than corporate bonds, or hold higher reserves than they do currently. As a result, annuity prices for those yet to retire and for those schemes looking to undertake a buy-out or buy-in may rise – potentially sharply.

From this perspective, it should be stated that the stock market prices are defined by the responsibility levels of the suppliers, and the matters of a risk-free rate of interest.

Recommendations

The further research of the market stock prices, and changes, associated with it should be based on the particular examples of the marketing activity. Originally, most companies are acting in accordance with particular principles, and rules which are st7ated in their corporate marketing strategy. The following research should be based on the concluded deals, where the principles of demand and supply are clearly traced. On the other hand, the principles of free trade should be also regarded and taken into consideration in the following researches.

Finally, the matters of Liquidity, Solvency and Profitability are defined by company’s activity and the origin of the offered goods, consequently, a particular emphasis should be made on the origins of the goods and services.

Bibliography

Baumol, William J. The Stock Market and Economic Efficiency. New York: Fordham University Press, 2004.

Bolten, Steven E. Stock Market Cycles: A Practical Explanation. Westport, CT: Quorum Books, 2005.

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Eagle, David. “The Equivalence of the Cascading Scenario and the Backward-Bending Demand Curve Theory of the 1987 Stock Market Crash.” Quarterly Journal of Business and Economics 33.4 (2004): 60

Haney, Lewis H. Business Forecasting: The Principles and Practice of Forecasting Business and Stock-Market Trends with Especial Reference to Business Cycles. Boston: Ginn, 2001.

Ma, Shiguang. “The Stock Market, Efficiency Predictability and Profitability.” Economic Record 82.256 (2006): 104

Munnell, Alicia H., and Steven A. Sass. Social Security and the Stock Market: How the Pursuit of Market Magic Shapes the System. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research, 2006.

Raines, J. Patrick, and Charles G. Leathers. “The New Speculative Stock Market: Why the Weak Immunizing Effect of the 1987 Crash?.” Journal of Economic Issues 28.3 (2002): 733

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