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What Factors Influence Asset Prices?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 20 September 2016
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Asset pricing is something that can change on a regular basis, depending on what is happening in the world and how those events impact the market in which the asset is traded. A wide range of events can cause asset prices to increase or decrease, depending on what is happening. Some of the more common factors that play a role in what happens with the value of a given asset is changes in supply and demand, political and other news events that may have some relationship to the asset in question, and projections of the future worth and desirability of the asset.

One of the key factors that affect asset prices are changes in supply and demand for the asset. Should consumer demand for the asset begin to subside, the price is likely to be lowered in an attempt to bolster sagging sales. For example, if some new technology renders the products offered by a given company obsolete, the shares of stock issued by that company will begin to lose value as the demand for those products begin to fall. Unless the company is able to refine, repurpose, or in some way enhance its product line and attract new customers, the price of the shares will continue to decline.

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In like manner, a change in supply can also make a difference with asset prices. When events like adverse weather conditions result in a reduction of the availability of an asset, the demand is likely to increase, which in turn will drive up the asset price. By the same token, when the number of housing lots in a desirable location are decreased for some reason, the prices associated with any of those lots that come up for sale will increase drastically over the prices that prevailed in times past.

News can also have an impact on asset prices. Changes in leadership in various companies may cause the price of stocks to rise or fall, depending on whether the changes are seen as good or bad by consumers and the business community in general. News of an impending war may drive down asset prices for some goods while increasing the prices associated with others. Even the results of a political election will likely have some impact on the prices of certain assets, positive or negative.

An ongoing factor that influences asset prices is the projections of how those assets will perform in the future. Investors will often choose stocks based on what they anticipate will happen with the asset prices a year, two years, or even ten years down the road. In like manner, a real estate investor will choose residential and commercial investments based on whether the asset prices are likely to appreciate or depreciate within a given time frame. Understanding the factors that are likely to impact asset prices and then projecting how those factors will make a difference makes it easier to avoid losses while improving the chances of earning a return over time.

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