Price Change Definition
Price change in finance is the difference between the initial and final values of an asset, security, or commodity over a particular trading period. The change is termed a positive change when the initial value is lower than the final value and negative if the end value is lower than the initial value.
Price changes over a period provide the investors and traders with relevant and crucial financial information. It helps them determine the favorability of the prevailing market conditions and make trading decisions accordingly. Moreover, shifts in prices can be estimated for different durations of time, ranging from a day to a year.
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Table of Contents
- The price change is the difference between a financial instrument’s initial and final value. It can be negative or positive.
- Price changes influence investor decisions. Therefore, a financial instrument that shows a consistent rise in price across a period will have investor confidence.
- A positive price change invariably proves beneficial to the investors as they promise high returns and vice versa.
- It can occur due to many reasons, such as government sanctions, mergers, and acquisitions, geopolitical events, industry news, etc.
Price Change Explained
The price change is the price movement from a certain position to a higher or lower value. The stock price change is an important indicator of a company’s financial status.
Fluctuations in stock market price happen due to many factors such as:
#1 – Launch Of Innovative Technology
The shift in price can be favorable to the company as it now possesses the capability of turning opportunities into profit. Similarly, recall of any products can have negative impacts. A product recall can tarnish the company’s reputation and decrease its share value.
#2 – Announcement of Dividends
DividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity. are profits distributed by the company to its shareholders. Dividends convey that the company has the potential to be successful. Similarly, releasing profits can also lead to a positive impact.
#3 – Contracts
Securing a large contract can attract shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. since it proves that a company can be trusted for its potential. Similarly, losing a contract can signal shareholders unfavorable conditions and make them step back.
#4 – Mergers and Acquisitions
MergersMergersMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm. happen when two companies unite to form a new entity, while acquisitions represent a larger company acquiring a smaller company.
The uncertainty and the time for completion may leave doubts in investors’ minds. The acquiring company’s shares may face a negative price shift, as it has to pay a premium to the target company. On the other hand, the stock price of the acquired company may rise.
However, a management change can seem desirable too. This depends on the particulars of the mergers and acquisitionsMergers And AcquisitionsMergers and acquisitions (M&A) are collaborations between two or more firms. In a merger, two or more companies functioning at the same level combine to create a new business entity. In an acquisition, a larger organization buys a smaller business entity for expansion. and how it is perceived in the market.
#5 – Scandals
Discovery of fraudulent transactions in a company’s accounts or scandal, or even a large employee layoff, can indicate that it is not financially sound. Similarly, government tax increments and negative news tends to reduce investor confidence.
Let us look at the following examples to understand the concept better:
Ben is an investor, and he wants to invest in the stocks of two reputable American companies. One of the factors that Ben should consider to arrive at a conclusion is the price change of their shares over the years.
|Opening price of per stock
|Closing price of per stock
|Opening price of per stock
|Closing price of per stock
Company B shows signs of volatility in its stock price.
However, Ben is a patient long-term investor. In that case, company A could be a more practical choice as it gives a consistent increase of value rather than exponential increases and dips.
Changes in price value can often have unforeseen, huge, and lasting impacts on the financial marketFinancial MarketThe term "financial market" refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces..
One such example is the stock market crash of 1929. There was a steep decline in the US stock market due to long periods of speculation preceding it. As a result, the security prices increased, and people started to invest more and more, pushing the price fluctuations to unsustainable levels and eventually leading to a huge downfall.
Effects of Price Change
Price change over a period in securities is a key factor in financial decision-making.
Some of its effects are:
- Crucial financial information analysis (including price change percentage) gives investors insight into future price predictions. These form the base of any investment strategyInvestment StrategyInvestment strategies assist investors in determining where and how to invest based on their expected return, risk appetite, corpus amount, holding period, retirement age, industry of choice, and so on..
- Various economic, social, or political factors and changes in the financial market can induce price changes. For example, the geopolitical crisis in Europe between Russia and Ukraine in 2022 has caused the market to be volatile, and US stock investors have been facing uncertainty due to the same.
- Compilation of price change data and percentages over a significant period and analysis of the same is a key indicator of the company’s sound financial and management position. A stock that has a positive value change gives the investors an impression that it has the potential to yield profits consistently and successfully.
- They are an indication of the well-being of a company. If stocks continue to perform well, profits will increase, resulting in stable bonuses and dividend delivery. Management will be satisfied and not leave, preventing the company’s downfall.
- Strong positive change in value wards off hostile takeoversHostile TakeoversA hostile takeover is a process where a company acquires another company against the will of its management. and, at the same time, attracts acquisition from bigger companies due to the financially sound image portrayed by the company.
- Negative price changes can often trigger a chain response of investors’ selling decisions, making the stock price dip further.
- Extreme changes in value over a short period make the market volatile, especially for publically traded securities. Therefore, a positive price change indicates increased demand for the said stock, increasing its value. Investors should note that the effect can be associated with a single security or a group of securities.
Frequently Asked Questions
The price change can be defined as the shift in the price of an asset over a certain period. In the stock market, it can occur due to various socio-economic or political reasons. Its calculation helps investors make crucial decisions on what to invest.
Price change that exists across all goods is an absolute price change. The changes in the cost of some goods relative to others are termed relative price change.
Absolute price change = Value of the indicator in period 2- Value of indicator in period 1.
Relative price change = (Value of indicator in period 2- Value of indicator in period1)/ (Value of indicator in period1)*100
Price change in economics is no different from the price change of securities, as securities are also traded types of commodity.
Stock market prices can frequently change, even within seconds in a single trading day. Since supply and demand is the prime factor, the price can go up and down with the number of buyers and sellers respectively. When buying and selling simultaneously occur, the price may fluctuate rapidly. In addition, any external events such as investment news or earnings reports can trigger market sentiments and influence the stock’s trade volume.
This has been a guide to Price Change and its definition. Here we discuss the effects of price change and its explanations along with examples. You can learn more about accounting from the following articles –