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3 Factors Affecting Share Prices

Certainly, there are just so many factors affecting share prices. For example, high oil prices, interest rates, GDP and CPI to name few. However, many beginners are focusing too much on the external factors than what can happen from the accounting perspective. They can easily get frustrated from their own ignorance. Therefore, before you think of getting cheated next time, spend time to read this article very carefully.

1) Dividend Effect

I love dividend as much as you do, but apparently, it does not comes for free. Simply because, the share price drops in the same value as the dividend paid after the ex-date. For instance, if Wal-Mart Stores Inc. decided to distribute $1 per share as dividend to its shareholders, its share price will generally drops from $49 to $48 per share after the ex-date.

So, do not comment so much in the future if the stock price drops after the dividend payout, because you took the money away already.

2) Bonus Issue

Bonus issue is additional shares given by the company to its existing shareholders. By doing so, the company is able to reinvest the dividend cash for better earnings growth. In fact, this is another way for the company to maintain its share price at cheaper rate without splitting the stocks. Bonus issue is also a good way to reward long term stock investor.

Ideally, the share price drops the same ratio of bonus issued. For instance, if the company is giving one new share for each four shares own by the shareholders, the share price will drop by 20%.

3) Warrants Exercise

With warrants, you have the right to buy shares from a company after the exercise date at specified price. As a result, its earnings will be diluted as more shares are sharing the same earnings pie. In general, the share price drops the same proportion of the number of exercised shares. For example, if the exercised share is 10% of the existing number of shares, the stock price will normally drops by 10% as well.

Unfortunately, unlike stock split, these factors are diluting the earnings per share (EPS) of the stock, which in turn will adjust the share price accordingly. That is why, the stock price will get affected if any of the events happen.

Although long term investors do not care much about it, stock traders (esp. swing traders, day traders, position traders) should consider these factors seriously.

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