Modern University for Technology & Information

Faculty of Management

Research Paper

Student and Course Information

Student Name: Islam Mokhtar Abdel Hafez Atia
Student Code: 83092
Course Code: FIN304en
Course Name: Investment Management

Research Tit

(Factors affecting stock prices)

Spring 2020
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 Introduction

The stock market is the main place for institutions to grow their stocks and increase their funds.
public institutions are able to offer and work on their shares in the market to gain more income to
expand the business. The market is the common factor between buyers and sellers of the stocks
and thus every institution listed in the stock market offers its available shares. The stock market
is the main source for the development of industry and commerce as it plays an important role
in developing industrial sector of the country. the stock exchange has a basic job by supporting
the economic growth of the country in the sectors of industry and commerce.

The market value makes the investor have an understanding if shares are currently worthy or
not. A stock's market value is important to the economy of a country. The value becomes
important when trading strategies are needed. For example, investors have the option to buy and
sell orders in the market, which are price limits for buying or selling shares. These orders can
prevent financial losses or allow an investor to secure market gains, this is according to the U.S.
Securities and Exchange Commission.

Whenever a company wants to raise funds for further expansion or settling up a new business
venture, they have to either take a loan from a financial organization or they have to issue shares
through the stock market. In fact the stock market is the primary source for any company to
raise funds for business expansions.

In this research we will discuss different factors that affect the stock market and why the stocks
are important to businesses, financial firms, companies and countries.

1-The factors influencing stock prices in different stock markets

Market Stock Price
The major objective of market definition is to evaluate the existence, creation or strengthening of
market power, which is defined as the ability of the firm to keep the price in a competitive
level. The market shares of the respective firms provide an indication of market strength. Also,
market definition ease the identification of relevant competitors and is useful in evaluating
the risk of potential coordinated effects in mergers. Furthermore, identifying the area of
competition

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allows other relevant competition issues to be examined, such as potential barriers to entry. Even
when the necessary data to perform the hypothetical monopolist test are not available, this test
provides a clear conceptual framework to define the relevant market.

Market definition is a complex task, there is a broad agreement that in some cases it can be called
into question Market definition is also one of the most important analytical tools to test and
evaluate the competitive challenges that an institution face and the influence of its behavior on
competition.. The main concerns about the limited value of even accurately calculated market
shares and concentration measures in specific kinds of markets (monti, 2012).Market definition
serves several goals in identifying the scope of competition in a market.

Politics

Most politicians get their campaign contributions from just a few individuals and, typically, these
wealthy benefactors represent massive companies or entire industries. When so many businesses
have their fingers in the political pie, election season has a huge impact on the stock market.
Foreign politics can have an effect on the U.S. stock market as well. Political shifts in countries
we are trading with or who we are involved in a conflict with can directly impact investors and
how they trade.

How Do Political Events Relate to the Stock Market? Political stability is a key factor that
controls the economy, reduces equity volatility and raises local and foreigner investor confidence.
Frot and Santiso (2012) posit that investors do not prefer political uncertainty about value
stability and future policies in the political environment. Moreover, a fall in equity flows
normally characterises an election. This happens only where the incumbent is not re-elected,
advising continuity is valued by investors. The choices of investors are affected by potentially
radical swings in policy. A decrease in the democracy score represents lower equity flows, but
democracy in itself does not affect equity flows that are consistent and equity funds are vigilant
when potentially adverse changes in the political environment arise

World Events
Aside from politics, there are a number of other world events (economic and otherwise) that can
influence the stock market, including:

 Natural disasters (hurricanes, tornadoes, etc.)

 Terrorist attacks
 Oil spills
 Riots/civil unrest
 Significant changes in government structure
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The Company's Size
There is a need to determine the frequency distribution of the size of the company, which
determines a measure of the size of the company and the corresponding periods of bin
count. For the definition of size, there are two methods which are - the company's total
assets as reported in monetary units and number of employees. Because of the heterogeneous
economic censuses, it may not be one or all of the measures available to selected industries. This
also reduces the comprehensiveness of this analysis (Coad, 2009)

Financial Leverage
Ratios usually compare the debts of a company to its assets. The common examples of financial
leverage ratios include debt ratio, interest coverage ratio, capitalization ratio, debt-to-equity ratio,
and fixed assets to net worth ratio (Gitman and Zutter, 2012).

Financial leverage ratios indicate the short-term and long-term solvency of a company. They give
indications about the financial health of a company. These ratios give indications whether the
company has got enough financial resources to cover its financial obligations when the creditors
and lenders seek their payments (Gitman and Zutter, 2012).

A company with adverse financial leverages ratios may not be able to cover its debts so it may go
bankrupt. These ratios can give warnings to the shareholders and directors of potential financial
difficulties. The shareholders and directors can take actions to prevent the company from going
bankrupt(Gitman and Zutter, 2012).

Financial leverage ratios help to determine the overall level of financial risk faced by a company
and its shareholders. Generally speaking, the greater the amount of debt of a company the
greater the financial risk is. A company with greater amount of debts and financial
obligations is more likely to fail to repay its debts (Gitman and Zutter, 2012)

Financial Leverage Degree Definition

Financial Leverage Degree is a ratio that indicates the proportion of a company's debt to its total
assets. It shows how much the institution relies on debt to finance assets. The Financial leverage
Degree provides the users a quick measure of the amount of debt that the company has on its
balance sheets compared to its assets. The higher the ratio, the greater the risk associated with the
firm's operation. A low financial leverage Degree indicates conservative financing with an
opportunity to borrow in the future at no significant risk (Gitman and Zutter, 2012).

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The Assets
Asset is an entity that brings the economic interest or a series of benefits in the future accounting
periods of contract or of the entity over a period of time, or the owner of the Economic derived
from the usefulness in previous periods, still receives a subvention in the current period. Because
it forms the stock of benefits in the future and it may be regarded as a store of value (Kieso et al.,
2010)

Classification of Assets
Assets that don't seem to be financial assets are not considered as financial assets. Non-financial
assets are divided into those that are produced, and those that are non-productive. This initial
level of classification of assets is very important since the method by that assets enter and leave
the record
differs for the three kinds of assets (Kieso et al., 2010)

Produced Non-Financial Assets

Come into existence through the import process or production. There are two exceptions.
Historical monuments contained productive assets even though it may have been built long
before the existence of economic accounts. Sometimes the monument could be argued that newly
become valuable, and thus enter the limits of asset is different from the current production
process. Similar arguments apply for artifacts treats valuables. Non-financial produced assets
leave the border that deplete assets or by selling them to the resident units that will not continue
to use the assets in the production as a source of future benefits or sold to non-resident units

Non produced non-financial assets

Separating line in the natural resources is the assets which do not depend on a number of factors.
Licenses, leases and contracts may be considered an asset of the holder when the agreement sets
conditions for public use or supply the products covered by the agreement, and thus enhances the
benefits to a party to the agreement goes beyond what can be back in the display case is
unrestricted. These assets come into existence when the agreement and promote the benefits
become clear. The balance sheet is being left, when it is lifted conditions restricting access or
when there is no longer useful to have won after restricting access to the assets

Profitability
The word "profit" is made up of two words, they are: profit and power. The ability is a term
refers to the force of the company to earn profit. The ability of the institution is also indicative of
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earning capacity, or operational performance. In addition to that, it refers to the ability of the
business to the financial and operational capacity of the company. Therefore, profitability can be
defined as any capacity of a given instrument to obtain the return by using them. Brigham and
Weston determine the concept of profitability as the "net surplus of a large number of decisions
and policies. (Brigham and Besley, 2011)
Measurement of Profitability
The importance of measuring profitability has been determined by Grewal, Hingorani and
Ramanathan Rand, "measure of profitability is a comprehensive measure of the efficiency." Since
profitability are many commercial activities results. Therefore, the measure is a multi-stage
concept. As mentioned before profitability is a relative concept based on profits. But profits alone
cannot express the concept of profitability. Thus, there arises a need for the relationship between
profit and other variables (Kathuo, 2015)

Return on Assets (ROA)

ROA is defined as the proportion of annual net income of the average total assets of business
during the financial year. It identifies the business efficiency when using its assets for net
income. This is the ratio of profitability (Zutter and Gitman, 2012)
ROA: The return on assets ratio formula is calculated by dividing net income by average total
assets.

Return on Equity (ROE)

The researchers agreed to use two measures of different profitability and value of the project to
determine performance. Uses of different profitability and value of the project is to determine
performance. Various measures of profitability that has been used are the ROE and EBTI. ROE
states shovel corporate results, which are affected by the carrying value of the shares, while
indicating the calculation of the company's profit attributable to shareholders, creditors and the
state in tax payments. The project provides for the value of the theoretical takeover price the
acquirer is willing to pay for the company (Berk and demoarzo, 2011).

ROE Analysis
ROE considered as an important measure profitability of the company. The higher values
generally mean that the company is effective in the generation of income on the new investments.
Investors should be compared to the return on the rights of shareholders of different companies,
as well as the verification of the trend in the rules of engagement with the passage of time.
However, only relying on the return the rights of shareholders and make investment decisions are
not safe. The management can be affected in unclear way, for example, when the use of debt

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financing to reduce capital, there will be an increase in the return on equity even if remain fixed
income (Gitman and Zutter, 2012)s

The Company Age

The company Age is the length of time that the institution has existed. The age is calculated by
knowing the difference between the years of incorporation until the current year.

Previous Studies
There are many studies concerned with the factors affecting share prices. For example: A study
by Al Masum in 2014 examines the proceeds excess stock market for all banks included in the
thirty-Dhaka Stock Exchange for the period from 2007 to 2011.

Attempts are being made to determine the existing relationship between the distribution of profits
and stock market returns policy of the private commercial banks in Bangladesh kind, and to what
extent return on equity can be explained through the distribution of their profits for the same
period of time the policy. Various theories concerning the distribution of profits are being used in
different parts of the world with different results and conclusions of the policy.

Sample size is large i.e. all the listed commercial banks of Dhaka Stock Exchange so the results
are reliable and valid. Panel data approach is used to explain the relationship between stock
prices and dividends after the control variables such as Return on Equity, Earnings per Share,
Retention Ratio have positive relationship with Stock Prices and significantly clarify the
variations in the market prices of shares, while the Profit after Tax and Dividend Yield has
negative, insignificant relationship with stock prices. The final results show that the dividend
policy has an important positive impact on stock prices.

Inflation and Deflation

Inflation is the term for the rate at which the cost of producing, shipping, and selling goods
increases. Inflation can cause companies to cut back on spending in an effort to save money
which, in turn, causes the price of stocks to drop. This often causes many investors to sell.
Deflation is when the cost of manufacturing and selling goods goes down. Despite the fact that
this sounds like a good thing, deflation can actually be bad in that it gives investors the
impression that the market is weak.

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Natural and Man-Made Disasters

Natural or man-mad disasters with economic consequences also affect stock markets. If an
earthquake happens in a bustling city where there's lots of economic activity, markets will move
down as investors fear a negative impact on economic growth. Similarly, if there's a disaster at a
man-made facility of economic importance, such as an oil refinery blowing up, it can put
downward pressure on stock prices

Oil prices

Oil is a vital source of energy, an essential transport fuel and an irreplaceable raw
material in many industries. Further, it has become the world’s most important
international trading item. The surge in oil prices has affected microeconomic variables, such as
production costs, investor decisions and industry growth and decline, and has also
affected macroeconomic variables, such as inflation, levels of national incomes, aggregate
spending and the balance of payments of different countries. The enormous sums involved affect
levels of international debt, the functioning of the world’s financial system and countries’
rate of economic growth (Cleaver 2007). There are three main causes affecting oil price
fluctuation: oil demand, oil supply and speculation. A study of Brevik and Kind (2004) has
asserted that the rise of energy prices is determined mainly by demand and supply and to
lesser but significant extent by the movement of speculators

3-Effect of Oil Price on Financial Market.

A study of Nandha and Faff (2008) employed monthly data from 35 industrial sectors from the
globally diversified industry portfolios to examine how oil price changes affect equity prices.
They found that only oil and mining industries have a positive effect on oil prices, whereas other
industrial sectors, such as aerospace, autos and parts, banks, beverages, chemicals, construction,
food and drug retailers, forestry, insurance companies, hotels and 28 telecommunications and
transport, have a negative significant effect resulting from oil price volatility.

The result from Sadorsky’s (2001) study demonstrates that such risk factors as exchange rate,
crude oil prices and interest rate have significantly affected the stock returns of Canadian oil gas
companies. He indicates that oil price factor is positively correlated with oil and gas share price

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returns, while exchange and interest rate factors are negatively correlated with oil and gas share
prices. Moreover, a study of El-Sharif, Brown, Burton, Nixon and Russell (2005) found that the

relationship between the movements of crude oil prices and 29 equity values in the United
Kingdom-listed oil and gas sector.
The finding indicates that the relationship is often positive, highly significant and reflects the
direct effect of crude oil price volatility on share values within the sector
Apergis and Miller (2009) discovered that oil market structural shocks, such as oil supply shocks,
global aggregate demand shocks and global oil demand shocks, have a significant role in
explaining the movement in stock market returns for a sample of eight countries, ly, Australia,
Canada, France, Germany, Italy, Japan, the United Kingdom and the US. Their finding shows
that the stock market has no large responsibility for the magnitude of oil market shocks. It can be
stated that other variables, such as exchange rate, interest rate andconsumer spending, seemed to
be significant in controlling the equity market in the samples

This study investigates the relationship between stock market return in oil importing countries,
namely Turkey, Tunisiaand Jordan. He applies the local macroeconomic activities, the monthly
returns of oil prices, interest rate, industrial production and stock market returns as variables. The
results showedthat the local macroeconomic activities were more significant rather than the
fluctuation of oil price in explaining the change of stock market returns. Sadorsky (1999)
investigated the relationship between oil prices, interest rate, industrial production, consumer
price index and S&P 500 index by using a VAR model. He found that the change in interest rate
could affectreal stock return and industrial productions rather than oil price movements.In
summary, oil price fluctuation is a long-term external factor affecting stock market volatility.
There are two groups relating to the stock market volatility affected by oil price fluctuation. First,
importing oil countries, industries or firms consuming oil as input will suffer a significant effect
because of the uncontrolled cost of production, which directly affects their profit, dividends and
then the narrowing down of their equity prices. Second, oil volatility might create indirect
channels to devalue equity by making interest rates higher and y depressing consumer
confidence. Consequently, volatility in the stock market can be correlated with the movement of
oil prices via firm values and economic activities. The following section presents the effects of
uncertain political conditions on financial market and Thailand’s stock market.

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4-Importance of stock market for economy
A main part of the economy of a country
Stock market is a core part of the economy of a country. The stock market has a great role in the
growth of the industry and commerce of the country that is affecting the economy of the country
on a large range.
That is reason that the government, industry and even the central banks of the country keep a
close watch on the happenings of the stock market. The stock market is important for the
industry’s point of view as well as the investor’s point of view.
In fact the stock market is the main source for any company to raise funds for business projects.
If a company needs to raise some capital for the business it can issue shares of the company that
is basically part ownership of the company. Whenever a company needs to raise funds for
further expansion or establishing a new business project, they have to either take a loan from a
financial organization or they have to issue shares through the stock market..

There are certain rules and regulations for getting listed at a stock exchange and they need to
meet same criteria to issue stocks and go public. The stock market is primarily the place where
these companies get listed to issue the shares and raise the fund. In case of an already listed
public company, they issue more shares to the market for collecting more funds for business
expansion. For the companies which are going public for the first time, they need to start with the
Initial Public Offering or the IPO. In both the cases these companies have to go through the stock
market

Supporting the growth and commerce industry

This is the primary function of the stock exchange and thus they play the most important role of
supporting the growth of the industry and commerce in the country. That is the reason that a
rising stock market is the sign of a developing industrial sector and a growing economy of the
country.

Attracts foreign capital

Due to its flexibility and higher return on capital, the stock exchange is capable of attracting more
foreign funds. Due to this, the exchange rate of the currency will improve when there is more
trade undertaken by the government.

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Monetary and fiscal policies
The monetary policy and the fiscal policy of the government have to be favorable to businessmen
and producers. If they are not so, then through the stock exchange the government may indicate
and
accordingly suitable steps can be taken.

Safety of Capital and Fair Dealing

The stock exchange transactions are made publicly under well defined rules and regulations and
bye-laws. This factor ensures a great measure of safety and fair dealings to the average investors.

Proper Canalization of Capital

Stock exchange directs the flow of savings into the most productive and profitable channels.

Regulation of Company management

The companies, which want to get their securities listed in the stock exchange, should have to
follow certain rules and fulfill certain conditions. Thus stock exchanges are like safeguards for
the interest of the investing public and also regulates company management.

Barometer of Business Progress

Stock exchanges function as a barometer of the business conditions in the country. Booms and
depressions are reflected by the index of prices of various securities maintained by the stock
exchange. By analyzing the ups and downs of the market quotations, the causes for the changes
in the business climate can be ascertained.

Economic barometer
The most important function of a stock exchange is that it acts as an economic indicator of
conditions prevailing in the country. A politically and economically strong government will have
an upward trend in the stock market. Whereas an unstable government with heavy borrowings
from other countries will have a downward trend in the stock market. So, every government will
adopt policies in such a manner that the stock exchange remains dynamic.

 Stocks attract foreign capital

Due to its flexibility and higher return on capital, the stock exchange is capable of attracting more
foreign funds. Due to this, the exchange rate of the currency will improve when there is more
trade undertaken by the government.

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 Conclusion

The study has discussed most of the factors that are primarily influencing stock prices. It is
clear that the stock market is the main place for institutions to grow their stocks and increase
their funds. Stocks markets are make public institutions able to work on their shares in the
market to gain more income to expand their businesses.
As the economy is growing and booming the stock market has become extremely attractive
for small investors. This study can be a used guide to for business students and researchers
to understand the main and the most common factors that influence the stock market, and nhance
market efficiency.
Stock markets are very important for companies and countries because they are a basic part of the
economic and industrial sectors of the countries. The stock market has a great role in the growth
of the industry and commerce of the country that is affecting the economy of the country on
a large range.

References
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2- International Journal of Business and Social Science, Factors Affecting the

Market Stock
Price,https://www.ijbssnet.com/journals/Vol_7_No_10_October_2016/9.pdf

3-Account learning, 17 Important functions of a stock exchange

,https://accountlearning.com/17-important-functions-of-a-stock-exchange

4- Day trader architects, 7 Factors That Affect the Stock

Market,https://daytraderarchitects.com/7-factors-affect-stock-market

5- School of BusinessVictoria UniversityMelbourne, The Factors Affecting Stock

Market Volatility and Contagion Thailand and South-East Asia by Paramin
Khositkulporn ,http://vuir.vu.edu.au/25907/1/Paramin%20Khositkulporn.pdf

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