Price Change

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.

Estimated reading time: 7 minutes

• 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.

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

Dividends 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 shareholders 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

Mergers 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 acquisitions 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: 

Example #1

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.

Company A.

Company B.

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.

Example #2

Changes in price value can often have unforeseen, huge, and lasting impacts on the financial market.

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. 

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 strategy.
• 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 takeovers 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. 

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 –

• Price Transparency
• Consumer Price Index (CPI)
• Price Inflation