by Dave Coker

Created on: June 23, 2008

Ok so you heard the rumor, talked to friends, read the news, discussed with colleagues, read some more, debated with family then finally went ahead and placed that buy order with your broker. Congratulations - you've got stock!

Now comes the hard part - hoping your shares increase in price. We all know the golden rule for investors is "buy low, sell high", but after all the research and discussion and soul searching and agonizing how do we know the price of our shares will go up? For that matter, how do we know the price won't go down? In fact it seems fair to ask what factors influence share prices in the stock market?

Good - in fact very good - question. But like any very good question, there isn't one very good - or even good - answer. But that doesn't mean we can't take away three broad lessons towards our goal of understanding what factors influence share prices.

The first lesson is we know share prices move in what's called a "random walk". In others words, they usually don't increase or (heaven forbid!) decrease in a straight line. Like the old expression "three steps forward two steps back", share prices tend to move about in what appears to be a random manner, up and down, down and up, time and time again.

But why do share prices move in a seemingly random manner? Another good question. Well, share prices move - change that is - in response to news. Good news or bad news, all news impacts share prices in different, and hard to predict ways. And considering that news itself is hard to predict, it would seem that our goal of understanding what factors influence share prices is even more difficult. But not impossible as the next two lessons will show.

That brings us to lesson number two: some news, called "market news", affects the price of all shares.

An example of would be a change in interest rates. An increase or decrease, it doesn't matter. What does matter is the fact that ALL shares will be affected. Some more than others, but every share traded in the stock market will be influenced by this factor, by a change in interest rates, in one way or another.

Finally, lesson number three: some news, called "security specific", affects only a specific company's share price.

An example of security specific news would be the much hyped launch of a company's exciting new product, or the dramatic failure of an expansion into a new market. This news is likely to influence only a single company's share price (ignoring, of course, the effect of bad news on a partner company or an broad sector). This news is specific to a single company.

So let's summarize the three lessons we've just learned. One, news influences the price of all shares traded in the stock market. Two, this news can be broad, in other words, affecting the entire market. Three, this news can be specific, only about a single company. Regardless, news is the primary factor influencing share prices.

And those shares you bought? How can we make sure that we're buying low so we can sell high?

Unfortunately, there is no way to be 100% sure. After all, even the pro's lose money in the stock market. But by carefully researching, taking our time, not rushing to purchase and by fully understanding what it is we're buying, we can increase the chances that most of the news influencing the price of shares we purchase will be good news.

Learn more about this author, Dave Coker.
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