The prices of the stocks are driven by a variety of factors, including macro and micro factors. At any given moment, the price of a stock is influenced by the supply and demand at that point in time in the market.

Also, fundamental factors such as the company's earnings, profitability, and sales, tend to drive stock prices to a greater extent.

Let us dive deeper to have a clear understanding.

When a company announces its quarterly, half-yearly, or annual results, it raises an expectation in the minds of the investors. A positive result raises an expectation that the company has performed well as compared to the past and will be continuing the same growth in the coming future as well. On the contrary, a negative result drags down the expectation of the investors, causing less faith in the company’s financials and its growth.

Thus, a positive result will cause the stock price to rise and a negative result will cause a fall in the stock prices.

The price of a stock can be broken down into 2 factors:

  1. Earnings per share (EPS)
  2. Price-earnings ratio (P/E ratio)

Earnings per share is the return on investment made by the investors. While the P/E ratio is a valuation multiple used to calculate the theoretical price of a stock.

With a company announcing its results, one can have the EPS of the company and with the pre-defined P/E ratio, the stock price can be easily calculated.

Price of the stock = EPS * P/E ratio

Once, the theoretical price of the stock is determined, now the investors compare the existing market price with this theoretical price and make their decision on whether to sell or buy a stock.

If the market price is less than the theoretical price, investors identify the buying opportunity thus causing the rise in the price of the stock. But, if the existing market price is more than the theoretical price, investors have a notion that the price of the stock is overvalued and thus sell their holdings which leads to a fall in the stock prices.

Alternatively, the free cash flows method and dividend growth model can also be used to identify the stock price of a company.

This was all about how the company’s fundamentals caused the movements in the stock prices.

Now, let us understand how a single company can cause the stock market to fall or rise.

NIFTY 50 is an index of the top 50 companies by market capitalization, across 14 different sectors majorly reflecting the Indian economy. It should be understood that movement in the stock prices causes the movement in NIFTY 50.

Here is the weightage of the major sectors constituting NIFTY 50.

From the above sectoral weightage and the weightage that each company has in the NIFTY 50 index, it can be depicted that a movement in either a sector or the company that has the highest weightage, will lead the NIFTY 50 in that direction.

But you know, not only corporates, but the government too can cause sudden movements in the stock market with its policies. Check out the next blog to know how.