Driver: What it is, How it Works, Examples

What Is a Driver?

A driver is a factor that has a material effect on the activity of another entity. Drivers affect change in their targets and occur at many levels of the economy and stock market. Macro drivers cause changes at the overall market level. Micro drivers cause change at the company level.

Understanding Drivers

Macro drivers affect large areas of the market at a time and often include large, widely-sweeping events such as wars, trade agreements or other geopolitical events.

A micro driver is anything that could materially affect either a company's earnings or the price of its stock. Every company will have its own unique drivers, although some of the most common drivers include the release of new products or services, new financing, commodity or resource prices, activities of competitors, legislation, regulation, and product diversification versus competitors. Micro drivers are most often employed in bottom-up analysis.

Stock-specific drivers often have no pure quantitative units of measurement, but are more qualitative in nature such as investor sentiment. Qualitative drivers are often intangible and inexact, making it more difficult to collect and measure. Still, understanding people and company cultures are central to any holistic analysis. Looking at a company through the eyes of a customer and understanding its competitive advantage assists with understanding drivers of company success.

Macro-Economic Drivers

Macro drivers are a big area of interest for fund companies running top-down strategies, as they're often concerned with what the global investment themes will be over their time horizon. Fundamental investors may be more concerned with micro drivers that affect the earnings and stock prices of the companies they are analyzing. The best fundamental investors will identify the three or four key drivers for the stocks they own and follow the status of those drivers religiously, knowing that they hold the key to the overall performance of the stock.

Examples of Drivers

An example of a macro driver might be a U.N. trade embargo on all of the countries in Africa. This would affect a large portion of the market, as natural resources that come out of Africa wouldn't be able to reach their usual importers. This would potentially have a negative effect on the industrials and materials sectors, as well as emerging markets stocks.

An example of a micro driver would be if a company like Coca-Cola acquired a large up-and-coming beverage maker that was stealing large parts of the total beverage Coca-Cola market share. This may have a positive effect on Coca-Cola stock and influence the stock price upwards. For a grocer, like Albertson's, wide margins are a large driver of company performance, while relative market share is less significant.