Investors need to understand the factors affecting stock prices to make informed decisions.

Why is it important to understand the factors influencing stock prices?

When participating in the stock market, one of the key issues investors must address is determining whether the current stock price aligns with its intrinsic value. To answer this question, it is essential to understand the factors affecting stock prices, which then allows for analysis of which stocks have potential, and whether to buy or sell in the current phase.

Grasping these factors not only helps investors evaluate long-term growth potential but also supports exploiting short-term market fluctuations. This is a crucial skill that differentiates seasoned investors from newcomers who are more vulnerable to market information.

Stock Price and Intrinsic Value of Stocks: The Fundamental Difference

Stock price is the cost that investors must pay to own a particular stock at a given trading moment. It is determined by buy and sell orders on the stock exchange at specific times, thus constantly fluctuating according to market supply and demand.

Unlike the stock price, the intrinsic value of a stock reflects the company’s real profit-making potential. Investors assess this through indicators such as P/E ratio, P/B ratio, P/S ratio, net profit, periodic financial reports, and market competitiveness. This value is not influenced by trading volume but mainly depends on business performance and the company’s financial situation.

The Role of Stock Valuation

Accurately determining a stock’s value offers many practical benefits:

• Helping investors identify reasonable buy or sell prices to optimize profits
• Supporting the issuance of shares by companies to raise capital and enhance company value
• Providing a scientific basis for comparing this stock with others in the same industry
• Reducing risks by avoiding overvalued stocks

Macroeconomic Factors Determining Stock Price Trends

Macroeconomic Conditions

The national and global economy directly impact stock prices. When the economy grows strongly, companies with high revenue and increasing profits pay higher dividends, making their stocks more attractive. Conversely, during economic downturns (such as during a pandemic), companies must cut dividends, and investors tend to divest, causing stock prices to fall.

This relationship is proportional: GDP growth → increased household income → more capital for stock accumulation → rising stock prices.

Market Sentiment and Investor Psychology

Each investor perceives the same stock differently. Some focus on the company’s long-term development and continue investing, while others fear risks and divest. Analytical information, forecasts on social media, and media outlets also strongly influence the decisions of new market entrants. The “herd mentality” phenomenon can temporarily boost stock prices but does not guarantee long-term sustainability.

Supply and Demand Laws Have a Direct Impact

The law of supply and demand is the fundamental driver of all trading markets. When many investors buy, stock prices rise. When sell orders increase, prices fall. However, investors should be warned that they should not follow the general buying and selling trend blindly, as these price fluctuations may be only temporary.

Political and Social Stability

Political and social instability domestically and internationally can alter investor confidence. When major incidents occur, investors often divest or halt new investments, leading to sudden drops in stock prices. Policy and legal stability are key factors that create favorable conditions for market development.

Policy and Economic Environment Factors

Inflation

When inflation rises sharply, interest rates are also increased to curb it. This reduces corporate profits because borrowing costs go up, leading to a decrease in stock prices. When inflation is controlled and decreases, interest rates lower, and stock prices have the opportunity to recover.

Interest Rates

High interest rates increase borrowing costs for companies, reduce net profits, and lead to falling stock prices. Conversely, low interest rates help companies save costs, increase profits, and consequently raise stock prices.

Exchange Rates

For companies involved in import-export activities, exchange rates have a significant impact. When the Vietnamese dong (weakens), export products become cheaper, increasing sales and profits, which raises stock prices. When the exchange rate (strengthens), the opposite occurs.

Fiscal and Monetary Policies

Expansionary monetary policy (injects more money) stimulates investment and production activities, increasing company revenue and raising stock prices. Tightening policies reduce the money supply, slow down the economy, decrease revenue, and cause stock prices to fall.

Main Methods for Stock Valuation

P/E Ratio Method (Price-to-Earnings)

The P/E ratio is the ratio of the current stock price to earnings per share over one year. A low P/E indicates the stock is undervalued, allowing investors to recover their capital faster with higher profits. A high P/E suggests the stock is overvalued, with lower expected profits.

P/B Ratio Method (Price-to-Book)

The P/B ratio compares the market price to the book value of the stock. This method works well across many industries but only assesses tangible assets, overlooking intangible assets like brand, reputation, and market share. A low P/B indicates undervaluation, while a high P/B indicates overvaluation.

P/S Ratio Method (Price-to-Sales per Share)

P/S is an indicator showing the stock price relative to revenue per share. P/S and stock price are positively correlated; the higher the P/S, the higher the stock price.

Discounted Dividend Model

The stock’s value is determined by the present value of all future dividends that investors expect to receive. This method is suitable for long-term investors holding stocks indefinitely.

Discounted Cash Flow to Equity (FCFE) Method (

FCFE is the total after-tax income of the company minus all debt payments, interest, investment costs, and working capital. This method provides a comprehensive view of the company’s true profitability.

) Discounted Cash Flow to the Entire Firm Method

The enterprise’s net cash flow is the total income of creditors, owners, and shareholders, derived from after-tax operating income without considering capital sources. This method offers the most comprehensive view of the company’s value.

Conclusion

Understanding the factors influencing stock prices is an indispensable foundation for becoming a successful investor. By combining this knowledge with practical experience, technical analysis skills, and continuous market news updates, investors can identify stocks with true intrinsic value and make reasonable buy or sell decisions. Constantly updating information, monitoring economic indicators, and market sentiment will help you seize the best investment opportunities and avoid potential risks.