STOCK PRICES

What is a ‘Stock Quote’

Stock quote is the price of a stock as quoted on an exchange. A basic quote for a specific stock provides information, such as its bid and ask price, last-traded price and volume traded. Investors increasingly access stock quotes online or on mobile devices, such as smartphones, rather than through print media such as newspapers and magazines. A large number of Internet portals and websites offer delayed stock quotes at no charge, with real-time stock quotes generally restricted to paying subscribers.

BREAKING DOWN ‘Stock Quote’
All stocks in the U.S. have been quoted in decimals, rather than fractions, since April 9, 2001. As a result, bid-ask spreads have contracted dramatically, with spreads for the most widely traded stocks now as small as a penny, compared with 1/16th of a dollar (or $0.0625) earlier. Decimal pricing has resulted in substantial savings on transaction costs to U.S. investors because of tighter bid-ask spreads.

Factors that can affect stock prices
Many factors can cause the price of a stock to rise or fall – from specific news about a company’s earnings to a change in how investors feel about the stock market in general –

1. Industry performance

Investor sentiment or confidence can cause the market to go up or down, which can cause stock prices to rise or fall. The general direction that the stock market takes can affect the value of a stock:

Bull market – a strong stock market where stock prices are rising and investor confidence is growing. It’s often tied to economic recovery or an economic boom, as well as investor optimism.

Bear market – a weak market where stock prices are falling and investor confidence is fading. It often happens when an economy is in recession and unemployment is high, with rising prices.

3. Economic factors

a. Interest rates

The Bank of Canada can raise or lower interest rates to stabilize or stimulate the Canadian economy. This is known as monetary policy. If a company borrows money to expand and improve its business, higher interest rates will affect the cost of its debt. This can reduce company profits and the dividends it pays shareholders. As a result, its share price may drop. And, in times of higher interest rates, investments that pay interest tend to be more attractive to investors than stocks.

b. Economic outlook

If it looks like the economy is going to expand, stock prices may rise. Investors may buy more stocks thinking they will see future profits and higher stock prices. If the economic outlook is uncertain, investors may reduce their buying or start selling.

c. Inflation

Inflation means higher consumer prices. This often slows sales and reduces profits. Higher prices will also often lead to higher interest rates. For example, the Bank of Canada may raise interest rates to slow down inflation. These changes will tend to bring down stock prices. Commodities however, may do better with inflation, so their prices may rise.

d. Deflation

Falling prices tend to mean lower profits for companies and decreased economic activity. Stock prices may go down, and investors may start selling their shares and move to fixed-income investments like bonds. Interest rates may be lowered to encourage people to borrow more. The goal is increased spending and economic activity. The Great Depression Era – 1929 to 1939, was one of the worst periods of deflation ever.

c. Economic and political shocks

Changes around the world can affect both the economy and stock prices. For example, a rise in energy costs can lead to lower sales, lower profits and lower stock prices. An act of terrorism can also lead to a downturn in economic activity and a fall in stock prices.

d. Changes in economic policy

If a new government comes into power, it may decide to make new policies. Sometimes these changes can be seen as good for business, and sometimes not. They may lead to changes in inflation and interest rates, which in turn may affect stock prices.

Growth expectations

Research over the years has proven that higher GDP growth doesn’t necessarily translate into higher stock returns in a particular country. The correlation between the two is actually negative. Take China, for example. From the beginning of 1993 through the end of the first decade of 2000’s, China’s GDP grew at an annualized rate of 11 percent, which ranked it first among countries represented in the MSCI All-Country World Index, according to a research paper released by Heckman Global Advisors. During the same time period, the MSCI China Index returned a measly 0.6 percent per year, on average. On the other hand, from the start of 2000’s, the U.S. economy grew at a much slower annualized rate of 5 percent, while the MSCI USA Index returned an annualized 9 percent.

Momentum

Despite what’s going on in the economy or with a particular company’s fundamentals, investors will sometimes trade on momentum. Often investor psychology can pile on and drive a stock price higher and higher, well above fair value, and that can happen for an extended period until finally there is a correction.

Central bank activity

Generally, you want to invest in a country in which the central bank is lowering interest rates. While interest rates remain at virtually zero in the United States, other rapidly-growing nations are being forced to raise rates because of inflation concerns. So while it seems that economic growth would be beneficial for stock prices, too much growth can actually have a negative effect. As these economies like China and Brazil grow faster and faster, they begin to overheat, then inflationary pressures rise, then the central banks decides that they don’t want inflation to get out of hand, so they start to raise interest rates, and usually, that’s a long process.