Which of the following factors can influence the market price of common stock in a competitive market?

• A. Changes in supply and demand for the stock
• B. The fixed cost of production for the company
• C. The company's historical dividend payments only
• D. Government-imposed price floors on the stock

Answer: (A)

Verified step by step guidance

1. Understand that the market price of common stock in a competitive market is primarily determined by the forces of supply and demand. This means that any factor that shifts the supply curve or the demand curve for the stock can influence its price.
2. Recognize that fixed costs of production for the company do not directly affect the stock price. Fixed costs are related to the company's internal cost structure and do not immediately change how investors value the stock in the market.
3. Note that while historical dividend payments can influence investor expectations and thus demand, relying solely on past dividends without considering other factors is insufficient to determine stock price changes. The market price reflects all available information, not just dividends.
4. Understand that government-imposed price floors on stocks are very rare and generally do not exist in competitive stock markets. Price floors would artificially prevent the stock price from falling below a certain level, which contradicts the idea of a competitive market where prices are set by supply and demand.
5. Conclude that the correct factor influencing the market price of common stock is changes in supply and demand for the stock, as these directly shift the equilibrium price in the market.