What Factors Influence share price?

When you look at the performance of the stock market at the end of a trading day it can be hard to work out why shares have either risen or fallen in value.

Broadly speaking, share prices are influenced by news or information: new data on employment, manufacturing, directors’ dealings, political events or even the weather, all kinds of news can influence the way shares move.

You will sometimes, however, see little move in share prices when, for example, interest rates shift. This is because investors try to anticipate what is going to happen in the next few months and try to move their portfolios in or out of these stocks before the rest of the market catches on. Sometimes, of course, these expectations can be wrong and if this happen, markets can move very sharply.

If you want success in shares trading you will need to know what news other investors look at and how they will look at it. This will help you pick the best moment to buy and sell your shares. Read more about monitoring news on a company.

The Economy
The health of the global economy has a fundamental influence on share prices because it is ultimately responsible for driving company profits. Broadly speaking, if the economy is growing, company profits improve and shares will become more highly valued. If the economy is weakening, company profits will fall and share prices will go down.

Investors look at a vast amount of data to try and work out what is going to happen to the economy and shift their portfolios before the events occur. This is why you will often see markets move well ahead of an actual event occurring. You may, for example, get little reaction from the stock market when interest rates rise. This is because investors have already anticipated the shift months in advance and adjusted their portfolios beforehand.

You can usually assume that the stock market will anticipate moves in the economy by around six to nine months. So if you want to stay ahead of the game you will need to follow economic data as closely as the professionals.

The kind of information you need to play close attention to is: employment data, the reports put out by the Monetary Policy Committee (to get an idea where interest rates are headed), trade with other countries, retail sales and manufacturing. Sentiment surveys produced by trade bodies such as the Confederation of British Industry are also important indicators of where the economy is heading.

It is not only news about the UK economy that will impact on share prices. The signals coming out of other major economies, particularly the UK’s major trading partners, such as the US and Europe will affect UK shares as what happens in these economies will have an impact on our own.

When looking at economic data, you need to think not only how the wider economy will be affected but whether certain areas will be more affected than others. A rise in interest rates is, for example, often bad news for house builders as people feel less confident about taking on debt. Retailers are often badly affected too as people spend less. Pharmaceutical companies are, however, usually unaffected as people’s demand for drugs is not influenced by the state of the economy.

Companies whose profits are closely tied to the health of the economy are known as ‘cyclical’ stocks. Those businesses that aren’t too affected by the economy are called ‘defensive’ stocks. If economic conditions deteriorate you will often see investors shift from cyclical stocks to defensives


Company News
The way investors interpret news coming out of companies is also a major influence on share prices. If, for example, a company puts out a warning that business conditions are tough, shares will often drop in value. If, however, a director buys shares in the firm, it may be a signal that the company’s prospects are improving.

Companies put out a great deal of news and most of the major announcements are covered by the financial press. But some announcements not regarded as so important and sometimes, particularly among smaller firms that are monitored less by investors and financial journalists, indicators of the company’s health can be missed.

You can stay one step ahead of the game by looking carefully at all the information sent out by companies you own, their competitors and other companies you are interested in. This information is usually available on companies’ websites.

Try to think laterally about the information you are getting. If, for example, a competitor to a company you have shares in produces a revolutionary new product, it will probably hit profits at the company you own. Also think about the impact it will have on suppliers to that business. An increase in sales of mobile phones with cameras in them will not only be good for the phone company but the firms that supply the technology in the phones.

Takeovers, or even rumours of takeovers also have a big influence on prices. This is because investors expect the bidder to pay a premium to shareholders.


Analysts’ Reports
Reports produced by independent analysts also influence share prices. If an analyst changes their recommendation from ‘sell’ to ‘buy’, for example, the shares will often rise in value. Analysts’ reports are produced primarily by investment banks for professional investors, although some stockbrokers will make their research available to private investors. You may find summaries of some reports published on financial news websites or in newspapers and magazines. Some investment banks also publish their reports on their websites for free.

You should remember that the recommendation an analyst puts on a company will affect its share price very quickly and can become irrelevant within hours. This is because the analyst will usually say a stock is a ‘buy’ within a particular price range. If the price moves above their targets the improvements the analyst expects may be ‘priced in’ and so the shares not worth buying.

But analysts’ reports are always worth reading, even if the recommendation is out of date. The reports usually contain a great deal of useful information on the company and how its business is developing. They also often look at how the company rates against its competitors.


Press Recommendations
The financial pages of most national newspapers and investment magazines usually contain share tips. Like analysts’ reports these tips can have a major influence on share prices.

If a journalist recommends a share, the price will usually rise and if they write a negative story the price will fall. These moves usually happen very quickly so if you are going to follow the recommendation it often makes sense to do so as soon as possible.


Sentiment
Investor sentiment is almost impossible to predict and can be infuriating if, for example, you have bought shares in a company that you think is a good ‘buy’ but the price remains flat.

Investor sentiment is influenced by a wide variety of factors. Share prices can, for example, be flat during the summer simply because so many major investors are on holiday or attending major sporting events such as Royal Ascot and Wimbledon, hence the adage ‘sell in May and go away’.

Investor sentiment can lead to irrational buying or selling of shares and result in bull and bear markets. A bull market is when share prices rise while a bear market is when they fall. In the technology boom of the late 1990s, for example, investors paid extremely high prices for shares and ignored traditional valuation measures, such as P/E ratios. This carried on until 2000 when investors belatedly realised these shares has risen too far and resulted in a three year bear market in shares.


Technical influences
Share prices can rise and fall for a variety of technical reasons that may have nothing to do with the actual outlook for an individual company or the outlook for the market.

It is, for example, a common occurrence for share prices to drop back after a strong rally. This happens because investors take profits on some of the shares that have risen in value, protecting their gains just in case the shares start to slip back. Investors often refer to this as market consolidation.

Another technical reason for share prices to rise or fall is the quarterly adjustment in the FTSE 100™ index. Shares that are expected to enter the FTSE 100™ may experience a sharper rise than one would expect in the weeks beforehand while shares that leave the index can fall more sharply. This happens because funds that simply track the index, have to match the composition of the index. Some professional fund managers who hold the affected stocks also adjust their portfolios as they do not want their holding to be too far above or below the company’s weighting in the index.

Share prices can also be affected by investors who use technical analysis to drive their investment techniques. Technical analysis, also known as Chartism, is simply the study of past share price movements and stock market index trends, which are then used to forecast how shares and stock markets will behave in future. Read more about strategies for investment.

Marketmakers can also influence prices. If they, for example, do not own enough shares to balance their books they will have to buy more. Marketmakers also influence prices if the market is looking flat, reducing prices to attract buyers.

Hotel Room Investment

Although it's one of the strangest forms of property investment, it could just catch on. The idea is simple: you buy a hotel room on a 999-year leasehold.

Prices range from £50,000 to well over £250,000. In return, you get 52 nights a year free accommodation at the hotel; the rest of the time the hotel lets out the room on its usual terms.

You typically earn 50% of the income from occupancy, and can put it into a self-invested personal pension (SIPP), so any income and capital growth are tax-free.
Guest Invest was the first company in the UK to promote this scheme in several central London hotels.

Owner Hotel is now selling rooms in two four-star hotels in Hull and York, and is building a low-cost hotel with much smaller rooms in Hull.

Four Pillars is running the Cotswold Water Park scheme, where it is selling buy-to-let hotel rooms aimed at the tourist market. And developer Galliard Homes is building a 900-room buy-to-let hotel opposite the House of Commons in central London.

It sounds like a good alternative to investing in a flat or house in city centres, where there may be a saturated market for renting.

But there are risks. First, there is no established resale market to prove if hotel rooms appreciate over time. 'Studies in the U.S. suggest capital appreciation will mirror the mainstream housing market,' says David Galman, of Galliard Homes.

He points to a study showing hotel rooms in Manhattan rising in value by 25% over four years, and another by UK hotel analysts The Bench, predicting increases in London room rates.

Second, it may be hard for investors to get a mortgage. 'There's not much appetite among lenders for this investment, which, in the past, has been considered riskier than conventional buy-to-let,' says Melanie Bien, of Savills Private Finance, a mortgage broker. 'We have a pool of lenders, among which there used to be three willing to give mortgages on hotel rooms. Now they've withdrawn those deals.'

But Guest Invest and Owner Hotel have their own finance deals. 'We sold rooms in York and Hull in a very short time. The interest rate we offered was 4% above base rate, but still we sold well because of the high returns on offer,' explains Andy Woodcock, the developer behind Owner Hotel.

'We're now re-arranging deals at between 1.4% and 2% above base rate.'

A third danger is a possible slump in hotel usage. Although Owner Hotel offers a 10% guaranteed rental income for the first two years of ownership, the investor must then rely on the market.

If there is a global shock - another September 11, for example - leading to reduced business and tourism, then occupancy could drop dramatically.

'That's why we haven't chosen the sexiest locations such as London, Paris or New York,' says Mr Woodcock. 'We're looking at new schemes in Halifax, Gloucester, Glasgow and Bath, where we reckon there's a shortage of goodquality, mid-cost business hotels. We think these will withstand any slowdown.'

Buying a hotel room as a UK property investment may be for the brave, but this room service may well work in your favour.

Visit Guest Invest to find out more: http://www.guestinvest.com

UK Property Investment

For an asset with all the bell boys and whistles, don't
just book a hotel room – buy it.

As property investment continues to cash in on the tourism market, drawing income from guests and sell for big profits, what's the room service like for investors?

The UK is a tourism hot- spot with a thriving hotel industry, and London has the highest average room rates in Europe. And in the past few years, property investors have been offered the chance to get in on the action by buying a hotel room, often in a plush new development.

But is this really the penthouse suite of investment, especially for those with no knowledge of the hotel industry? And what is the chance of making a genuine, sustained profit in such volatile times for the domestic and global economy?

The theory is that those with a minimum of £50,000 can buy a room that is then managed entirely by the hotel itself. Investors don't need to worry about people stealing the bathrobes or rock stars throwing TVs through windows; the cost of repair or replacement will be borne by the hotel.

Owners typically earn 50 per cent of the income from occupancy, and get around 52 nights every year to stay in one of the company's chain of hotels. The room can even be added to a self-invested personal pension (Sipp), so income and any capital growth are tax free. The general rule is that the better the location of the hotel, and the more stars it attracts, the higher the starting point for investment.

GuestInvest, a hotel room investment firm, focuses on the very well-to-do investor, with rooms in its most upmarket hotel starting at £1m for Blakes in west London. Its latest project, The Jones near Hyde Park in central London, offers rooms from £317,000 and the investment comes with a 6 per cent guaranteed return for the first year.

If you can't quite stretch to that, others, such as the Owner Hotel chain, offer rooms in budget hotels from around £50,000.

"This is a purchase that bucks the trend in investment," says Johnny Sandelson, chief executive of Guest Invest. "Returns are based on occupancy rates, which continue to rise – as against stagnant house prices and a faltering stock market."

Any capital growth depends on the success of the hotel and the value of the land on which it's built. As for the level of annual income earnt, this relies on the hotel's occupancy rate, which in turn can often depend on tourism.

So with property prices – even in London – falling and the US possibly heading towards recession, with the potential fallout this has for the British tourism industry, are hospitality investors set to lose out?

The hotel investment firms say the good times continue to roll and that some eye-catching returns are still possible. According to GuestInvest, people who bought rooms in 2004 at its Guesthouse West, in Notting Hill, west London, are enjoying annual income of around 8 per cent. Those who have since sold their rooms, GuestInvest reports, have netted average capital growth of 15 per cent.

Meanwhile, Owner Hotel says that, based on 90 per cent occupancy of its £49.99-a-night rooms, the annual income for owners is around £7,547 before the annual service charge is deducted. That equates to 15 per cent of the £50,000 original investment. If the room is occupied for only half the time, the annual income drops to around £4,923, or 8.2 per cent. Nevertheless, that's a better return than can be gleaned from a savings deposit account or, in most years, shares.

But Peter McGahan, managing director of independent financial adviser Worldwide Financial Planning, is sceptical about hotel room schemes. "The exceptional returns are based on almost total occupancy," he points out. "And you have to ask yourself whether hotel rooms are only ever empty for a few nights of the year."

Hotels may be in for a rough ride, he adds, with the downturn in the global economy meaning that fewer people have spare money for holidays. Americans have been hit hard by their own credit crunch and the low value of the dollar against the pound. Considering that US tourists made up almost 12 per cent of the total number of overseas visitors to the UK in 2006, this alone could have serious repercussions for room occupancy.

If you are still keen to buy into one of these deals, but don't happen to have several hundred thousand pounds burning a hole in your pocket, there are only a few lenders that will be willing to give you a mortgage. GuestInvest works with four mortgage pro- viders, including Bank of Scotland. Its product offers a loan of up to 70 per cent of the room price, in a tracker deal set at Bank of England base rate (5.25 per cent currently) plus 1.5 per cent. That is one of the highest rates of interest around.

GuestInvest's rooms can be sold on the open market, or through the firm itself, says spokeswoman Sally Wiber. But Miles Shipside of property website Rightmove points out that the likely size of any profit between buying and selling is hard to assess. "This is a very new industry with no track record of capital appreciation to look at."

In the current property market, he adds, "how reliable is the valuation of the appreciation of a hotel, let alone one room in a hotel?"

GuestInvest claims that its rooms are typically on the market for just eight weeks before being sold. But experts question how easy it really is to sell rooms if there are so few lenders offering funding.

Mr McGahan urges investors to be cautious and asks: "Why – if they are confident of such huge returns in the long term – are these companies offering these deals to investors rather than keeping them for themselves?"