This document analyzes the fundamental factors affecting stock prices on the Indian stock market index SENSEX. It examines previous research on factors influencing stock markets in India and internationally. The paper identifies critical variables with a significant effect on stock price movements and aims to establish relationships between explanatory variables and stock prices. Factor analysis is used to condense variables into critical factors influencing stock prices. The analysis finds higher earnings, returns on investment, growth potential and favorable valuations positively impact stock prices, while higher risk and volatility have negative impacts. These factors can help investors, corporations and brokers make better investment decisions.

1. International Journal of Accounting and Finance
Issue: Volume 1, Number 3 / 2009
Pages: 323 – 355
URL: Linking Options
Analysis of the fundamental factors affecting the market price of shares constituting the
Indian index: a study of SENSEX
Niladri Das A1
and J.K. Pattanayak A2
A1
Department of Management Studies, Indian School of Mines, Dhanbad-826004, India.
A2
Department of Management Studies, Indian School of Mines, Dhanbad-826004, India
Abstract:
This paper examines the various research studies undertaken in the Indian and international
context highlighting the effect of various fundamental factors on the behaviour of the stock
market. This paper tries to identify the critical variables which have a significant effect on stock
price movements and influence the entire market's movement. The 30 shares constituting the
Bombay Stock Exchange-Sensitivity Index (BSE-SENSEX or SENSEX) are used as proxies to
capture the entire stock market's movement. Appropriate statistical techniques have been used to
establish a meaningful relationship among various explanatory variables identified through the
empirical analysis considering the available research studies. The explanatory variables, which act
as major determinants of stock price movements, are condensed into a few critical factors by
factor analysis and the relevance of these factors in influencing stock market movements is
explained in detail. The analysis shows that higher earning power, Returns on Investment (ROIs),
growth possibility and favourable valuation have a positive impact on the share price and stock
market movement, while higher risk and volatility have a negative impact. These factors can be
used as major analytical tools by investors, corporations and brokers to make rational and
intelligent investment decisions.
Keywords:
fundamental factors, stock market movement, sensitivity index, SENSEX, India, critical variables,
share prices

2. Factors That Affect Stock Prices
By Renee McCalman, eHow Contributor
updated: May 31, 2010
1.
Stock prices are affected by many factors that can cause the value of the stock to rise or fall.
Stock prices are affected by many factors that can cause the value of the stock to rise or fall. The
fluctuation in stock prices ultimately affects the buying and selling of stocks. Some factors that
affect stock prices include world news, company news, market sentiment, supply and demand,
company earnings, company mergers or takeover and dividends.
Market Sentiment
2. Public sentiment regarding the stock market can cause the market to either go up or down and
consequently that can result in the rise or fall of stock prices. The direction that the stock market
takes affects the value of the stock. When the market is a bull market that means that there is
investor confidence and stock prices are expected to rise.However, during a bear market session
there is negative market sentiment and a lack of investor confidence. Stock prices generally rise
during bull market periods and fall during bear market periods.
News
3. The news can have either a negative or positive effect on the prices of stock. National news,
world news and company news all affect stock prices. Bad news can cause stock prices to drop
significantly while good news may either have no effect or result in a small to large rise in stock
prices. Fear, insecurity and doubt can come as a result of negative news stories about global
recession, economic crisis and even national security. These elements can have a negative
effect on investor confidence in the stock market causing stock prices to fall. Negative press
about a company can lower the value of the stock causing the stock prices to fall. Likewise good
news about a company can lead to added interest in company shares, increasing the value and
this can result in a rise of stock prices.
Industry Conditions
4. Conditions in the industry related to the stock can either negatively or positively affect the price of
the stock. It all depends on the type of sector or industry the stock is in since some sectors are
prone to a cycle that can lead to higher selling prices or lower selling prices. Even the popularity
of a certain sector can affect the price of the stock because the price and the value are directly
related. Higher valued stocks have a higher price than lower valued stocks. For instance
technology stock commonly known as blue stock is one of the most popular types of stock to
invest in because the technology industry is vibrant and becoming increasingly stronger.
Consequently the prices of this type of stock is higher than stocks in other industries
experiencing a downturn.

3. What Economic Factors Affect Stock Prices?
By Alexis Writing, eHow Contributor
updated: February 8, 2010
1. The stock market is perhaps the most dynamic component of the world market, especially the
Foreign Exchange or Forex stock trading market. Although the market can be vibrant and active ,
especially with the potential profit, stock prices are very volatile. It is therefore essential to
familiarize yourself with the economic factors that impact the trends in the stock market if you
want to participate in it.
Supply and Demand
2. The most basic principle of economics correspondingly reflects the market equity. Price is
directly affected by stock market trends in trading. When more consumers purchase a particular
type of stock, its price will automatically increase. And when more traders sell that stock, its price
will then plunge. It is not easy to determine stock market trends but your broker can provide you
with some idea of the current market trend to guide you.
Inflation and Interest Rates
3. All stock markets are affected by inflation and interest rates. Since the country's central bank
mandates its monetary supply and policy, this becomes the primary focus of the stock market
participants, particularly the investors. Even the perception of the investors and traders on what
is likely to happen with interest rates and inflation will also impact the stock market prices is
various ways. People's interest in investing in a particular economy (and thus in the companies
within that economy) is based in part on beliefs about whether the country's currency prices will
increase or decrease.
The interest rate is the measure of pricing levels, whether they increase or decrease for a certain
time period. Because of the growing number of commodities that are available in a country's
market, the way these products and services are grouped will be used to calculate the changes
in its pricing. An increase in its pricing will indicate an inflation rate that will go up, which
correspondingly can weaken the currency.
Trade Flows, Political and Macroeconomic Events and Activities
4. A country's stock market can be influenced by the monetary flows that are brought about by the
trading between countries. For instance, when the country's imports exceed its exports, it is likely
that the currency will devalue. More investments in the country on the other hand will strengthen
the currency.
Events such as political instability or crisis can influence negative effects in the economy.
However if such events occur in a country which successfully survives the political crisis, it can
actually help improve the economy as it allows other countries to regain confidence.

4. How to Analyze Stocks in the Market
By an eHow Contributor
Stocks must be analyzed properly before investing in them
The stock market is a means of investing money in stocks offered by firms and organizations.
Having good knowledge of how to identify the best companies in which to purchase stock and
understanding the many factors that influence a stock price is important in making investment
decisions.
Difficulty: Moderately Challenging
Instructions
1.1
Gain knowledge about issues that affect the stock market including inflation trends, regulatory policies,
controlling interests, job growth statistics and all other reports that are filed by the Federal Reserve Bank.
You will also need to understand the policies of the host country's National Bank, especially when
investing in foreign company stocks.
2. 2
Study how external factors like politics, fashion, sports, the economy, and world events affect the
performance of specific stocks as well as the stock market in general. Reading newspapers will help in
gaining better knowledge.
3. 3
Constantly monitor business trends and the companies that are in various industry sectors, such as
technology and finance. This will be easy if you have access to daily financial newspapers.
4. 4
Choose a company that is best suited for purchasing stock. You will have to research a particular
company's trend and the stock prices over time.
5.5
Review a company's propectus, balance sheet and quarterly reports.
6. 6
Learn some of the various technical indicators in analyzing stocks prices in an attempt to spot trends.
Technical analysis involves looking at past price and volume values and their behavior to try to predict the
next moves in the stock price. Stock charts of companies, which are often used for technical analysis, are
free at many websites online. Your brokerage firm will also have online stock charting available.

5. Understanding Stock Market Prices
By Jonathan Langsdorf, eHow Contributor
updated: April 29, 2010
Different factors affect values in the stock market.
The stock market is composed of thousands of different stocks or shares of corporations. The
market changes on the prospects of the individual companies, and it also tends to move as a
single entity. Stock market investors should have an understanding of the factors that affect stock
prices.
Fundamentals
1. The stock of an individual company is an ownership share in that company. The share price
should reflect the assets of the company and place a value on the future growth and dividends
paid by the company. Investors look at how much the company is earning in profits per share
and what the prospects are for future earnings.
The price of the stock should be in relation to the current and projected earnings. The price to
earning ratio, or PE ratio, is used to determine an appropriate value for the stock.
Effects
2. The stock market works on the principles of supply and demand. For every stock trade, there
must be a buyer and a seller who are willing to accept the price. If there are more buyers than
sellers, the price must rise to the point where more stock owners are willing to sell and less
buyers will pay the higher price. If willing sellers exceed the buyers at a certain price, the price
must fall until there is again a balance. The stock market trades a large volume of stock with little
price friction, so the price movement due to supply and demand is a continuous process.
The stock market trades a large volume of stock with little price friction, so the price movement
due to supply and demand is a continuous process.
Considerations
3. The different factors affect stock prices over time. An example using the price of IBM stock can
illustrate the process. In July 2008, the U.S. stock market was near a peak and investors
believed in the future of many companies. Then a financial crisis hit Wall Street, and the value of
the entire stock market tumbled.
By November 2008, IBM stock had fallen to less than $75 per share. Then, over several quarterly
earnings reports, IBM reported that the company was not affected by the crisis, and that earnings
were continuing to grow. By the end of 2009, IBM stock was back to $130.
Potential
4. The value of the stock market and stock prices is driven both by the fundamental values of the
individual companies and by the emotional state of investors. Individual investors who
understand these principles can profit by buying fundamentally sound stocks when the market is
selling off because of fear.
It is difficult to go against the emotions of the market, but famous investor Warren Buffett notes
that the time to buy is when everyone is selling, and the time to sell is when everyone is buying.

6. Read more: Understanding Stock Market Prices |
eHow.com http://www.ehow.com/about_6398170_understanding-stock-market-prices.html#ixzz13Nb2F5pU
What Makes Stock Prices Rise and Fall?
By Ashley Ward, eHow Contributor
updated: May 27, 2010
Stock prices rise and fall for a variety of reasons.
The demand for a stock is based on a variety of factors. Some of these are economic factors,
such as interest rates, and others are unique to the individual investor, such as an investor's risk
tolerance. Investors should note that stock prices can be affected by some of these factors at
one time or possibly all of these factors at one time. It can be difficult to isolate the effects of one
particular factor.
Interest Rates
1. When the Federal Reserve decides to raise interest rates, consumers delay their purchases and
start to save money due to the increased cost to purchase items. As a result, a business makes
less profit. When investors notice decreased business earnings, investors sell stocks and stock
prices fall. Similarly, when the Federal Reserve decides to lower interest rates, consumers often
decide to spend because of the decreased cost to purchase items. When consumers
spend, businesses see an increase in profit. As investors notice the increase in business earnings,
they start to invest in the stock market, which increases the demand for stock and stock prices
rise.
Investments
2. When a business determines that the return on an investment is not enough to compensate the
business for its costs to invest, it will not pursue the investment. As investors notice this decrease
in investment activity, investors sell stock because the stock is worth more now than what it will
be in the future, and investors want to avoid losing money. As more investors sell stock and
demand for stock decreases, the price of stock decreases.
Earnings
3. When the economy shows signs of declining, a business's earnings decrease. With decreased
earnings, businesses may choose not to pay the amount of dividends that were paid in previous
years. For investors, this means that they earn less income and it serves to discourage investors

7. from investing in stocks. In addition, investors currently invested in stocks may choose to sell as
they discover other investment vehiclesthat will provide more income. As the demand for stocks
decrease, stock prices fall.
Labor Market
4. When a company cuts its work force, this initially has a positive effect on stock prices. Fewer
employees means the company has increased profits as it pays less in salaries and benefits.
When investors notice increased earnings for a particular company, they may choose to
purchase the stock, which increases demand and stock prices rise. However, an investor should
note the reason that a company has decreased its work force. If the company is having trouble
finding new business, then the reduction in the company's work force is a warning sign to
investors. If investors notice this, they will pull their money out of the company and the stock
price will fall.
Risk Tolerance
5. Investors can be cautious with their money. When market scandals surface or investors note
trouble in other parts of the economy, investors loose faith in the stock market. This decrease in
investor confidence pushes investors to sell stocks. As the demand for stock decreases, stock
prices fall.
What is Crude Oil's Effect on the Stock
Market?
By Jay Way, eHow Contributor
updated: July 7, 2010
Even oil from deep waters may send waves to the stock market.
A dominant source of energy in the economy, crude oil can both promote and hinder economic
growth as changing oil prices interact with economic activities. The stock market, as a general
representation of the economy, can respond quickly to trading moves in oil pits when looking for
economic indications. Through price as well as demand, crude oil may affect the stock market
either positively or negatively given how the economy is faring at the time.
Crude Demand

8. 1. Because crude oil is a strategic commodity that the economy depends on, it's hard for the
economy to tolerate high oil prices for very long. In a November 2007 "New York Times" article,
Fatih Birol, chief economist at the International Energy Agency, conveyed the idea that prolonged
high prices create affordability issues and eventually hurt both producers and consumers. On the
other hand, oil prices don't stay low for any extended period in today's global economy, which is
hungry for oil.
Market Cycles
2. The economy and the stock market go through booms and busts for a host of economic and
financial reasons, including effects from crude oil. In a bull market, investor demand drives up the
prices of assets across the board, pushing aside cost concerns. A "Wall Street Journal" article on
June 22, 2008, mentioned that higher fuel costs can be absorbed by consumers
and businesses sometimes. But in a bear market, investor liquidation scales down the availability
of resources, damping down demand along the way. For crude oil to have any impact on the
stock market, it is by working through the market dynamics of rise and fall.
Correlations
3. When the stock market emerges from a trough, a low crude price benefits the market by reducing
energy costs to the economy. When the economy picks up more oil demand, a rising crude price
may lead to higher stock prices as supported by a healthier economy. But if oil prices keep rising
and become unaffordable, the stock market retreats as costly energy uses eat into economic
growth. In that case, even as crude oil falls, the stock market continues to trend lower before a
new round of oil demand has yet to solidify. Crude oil's effect on the stock market is neither
consistently negative nor positive. A 2008 study on the same topic from the Federal Reserve
Bank of Cleveland underscored this point.
Market Speculation
4. In addition to the easily observed effects from what consumers pay at the pump and companies
buy on the spot, the seldom-admitted speculation in setting crude oil prices on futures markets
has an impact on the stock market as well. For example, if oil traders suspect a positive outlook
on the economy, they would most likely bid up futures prices and the stock market may take it as
an affirmation of its own bullish belief, pushing up stock prices further.
Effect Limitations
5. Change in crude oil price may not affect different stock indexes equally. Some companies in
certain industries are exposed more than others to the rising and falling fuel costs. The Dow
Jones Transportation Index has had a more negative correlation with crude oil price that is
statistically significant at the 95 percent confident level, as shown in the 2008 Cleveland-Fed
study. The broader the market goes, the lesser impact crude oil may have, a diluting effect of
having a mix of companies from a wider range of industries.