What are the factors that affect the stock market, Ups and downs. Image credit AdobeStock
Anyone who has invested in the stock market knows that the price will fluctuate. But for some people, the fluctuation may seem abrupt and stressful. You will be able to master the graph when you are willing to devote time to see past fluctuation and study a larger picture. With time and patience, you will gain experience and will be able to interpret better. For more information visit best stock trading app australia.
The following are some of the primary factors that affect the ups and downs of the market:
Generally, the interest rate has a role to play in the change in the stock market. The primary cause behind this is the impact it holds on companies’ cost of borrowing funds. But this is not wholly true because the interest rate is not the primary driver.
Interest-bearing investments keep on competing with stocks for investor’s capital. Thus, the investors opt for the safety of fixed income when the rates are high. However, when the rates are low, stocks become more tempting than interest-bearing investments.
One of the significant factors affecting the stock market is the country’s economy. Generally speaking, when the state’s economy is good, it indicates a stable GDP or gross domestic product. Thus business feels much more secured in expanding, and investors get encouraged to invest more.
Moreover, if a growing economy results in higher wages, people will have more money to invest in shares. Thus, they will spend more money, thus, directly contributing to publicly traded companies and increasing their earnings.
However, in the reverse situation, when the company is declining in recession, everything affects negatively. The net effect which you can see in the market is negative.
In an economy, you can explain the price movement by showing the difference between the supply from producers and the demand from consumers. This is the reason why economist says that market always falls back to equilibrium. Equilibrium is the point where demand equals supply.
By supply, we mean the amount of shares people want to sell, and by demand, we mean the amount of shares the investors are willing to purchase.
If the number of buyers increases, there is more demand. Thus the buyers bid up the prices of the stock. In contrast, when there is an increase in the seller’s number, the price of the stock bids down, hoping that it would attract the investors or buyers.
Individually, stocks and bonds that act as a security instrument depend on the issuing entity’s performance. As a result, the stocks will be valued more in the future, or the entity will pay debts.
The relationship between demand and supply is often known as a sentiment. When stocks are in high demand and the investors are willing to buy them at a high price, the sentiments are positively impacted. This impact leads to fewer stock owners wishing to sell and an increase in the number of buyers.
Extreme sentiments can ironically bring about significant market fluctuation. Thus, when the positive sentiment reaches its extreme point, it is evident the stock market will drop.
Many investors monitor extreme sentiments and trade in the opposite and prevailing attitude. The cause of the attitude is simple there is more room for some investors to change their minds. But when the sentiment is more balanced, there is more room for doubtful investors to join and start a trend.
It is evident that if a company has public shares, then the company’s internal factors are directly going to affect the stock price. Thus, if a company is at its boom, with increased revenue, successful product release, reduced debts, and more investors, the increase in stock price is imminent. This is because simple people will want to buy the company’s shares that are gaining so much strength.
In contrast, if the company is at a recession stage, failing to launch a new product, having massive debt, etc., most of its investors will want to dump the shares. As a result, the stock price reduces.
However, other company markets that can affect the stock market are mergers, changes in the company’s management, and acquisition.
The goal of all the markets is to facilitate trading. When there is an imbalance in supply and demand, it results in market ups and downs. Prices remain consistent if there is no change in supply and demand and when they are equal or balanced.
However, if there is more supply than demand, the seller satisfies at low prices to compete for buyers’ interests. As a result, the stock reduces its price. Similarly, when a stock is in high demand, the buyers compete among themselves who are willing to pay more. Thus this results in stock price increasing.
Apart from the above factors, there is another significant factor, but we cannot do anything about it. Calamities like floods and earthquakes reduce the price of the stock. This deduction may be due to the destruction of an asset or property. Natural calamities always bring suffering to companies. The sales drop down to a large extent affecting manufacturing and transportation. Thus, during a natural disaster, it is evident that the stock price will fall.
Apart from the above factors, many more factors can affect the stock market’s ups and downs. It is essential to keep a check of all of them. However, if you cannot keep a check of all, make sure you analyze the major ones, i.e., the ones mentioned above. It helps avoid losses in the future.