5 Factors That Influence the Stock Market – Explained
While the success of a trader relies mostly on their abilities to anticipate market changes and act upon them, the stock market is known for being fairly volatile. For tens of years now, experts have been trying to isolate and analyze the factors that are most likely to affect the movement of prices, as well as the stock market in general. Those factors can vary from economics, governmental changes, and even natural disasters.
In general, those factors don’t influence the market per se, but actually, the companies that issue shares on the market. The September 11 events, that took the US by storm in 2001, for example, caused investors to trade much less and shift their direction towards less-risky stocks.
With this being said, below is a list of five of the most important factors that can move prices up or down the grid.
It is obvious that, for companies in countries with high economic growth, company dividends have a more chance to increase, which influences share prices. At the same time, if there is an industry growth of some sort, it will influence most, if not all, of the companies in the said industry.
Inflation and deflation are other economic factors that are highly influencing the stock market. With inflation, consumer price grows, which means profits will decrease for companies, as sales are being affected. Inflation is highly linked to increased interest rates as well, which also hurts stock prices. On the other hand, inflation may boost commodities, which will make their prices rise.
With deflation, even though company profits will decrease, with will lower stock prices and determine investors to sell their shares and turn towards more stable investments, such as bonds. At the same time, this is the moment where interest rates may be lowered, to determine people to borrow more.
Political factors can highly influence the economic activity of a country or region, and affect terribly the profit companies make. These political factors can include a change of government, new laws, or even an attack on the government.
Such changes in countries that have a high economic and political influence over the rest of the world, can affect not only the market in said countries but foreign markets as well. This has to do with the fact that countries develop partnerships, and when a country, that has a strong partnership with another country, experiences a change in government, those partnerships may suffer. This will drag markets down. At the same time, the election of a different government, that may be open to partnerships, can boost markets when new partnerships are being developed. According to common belief, financial markets will register a decline especially in the first year following a presidential election, and a good example can be the year President Barack Obama got elected.
The above mentioned situations usually happen in democratic countries. In countries with a more totalitarian government, other factors, such as riots or revolutions may have a bigger chance of influencing the market.
There is a reason why traders are constantly trying to find the best news sources because news can highly influence their decisions. Although the news is not always a factor that directly influences the development of a company, it has much to do with the way people sell or buy stocks. When news about a certain company or country is negative, people will rush to sell stocks, which means prices for said stocks will decrease. On the other hand, when the news is good, people will look to buy stocks, which means market prices will increase.
If earnings decrease for a company, or it is discovered that there were some poor management decisions made, that may lead to unexpected losses, people will look to sell those stocks. At the same time, if a company registers steady growth and shows signs of profit, individuals will become interested and look to buy stocks, which will increase prices.
Cybersecurity attacks, for example, were quite a hot topic in the news recently, which determine a lot of people to sell stocks for companies that were under risk.
The greatest impact, however, seems to come from unexpected news. If, for example, a company was expected to register losses, but it turned out they managed to actually increase profits, this will determine traders to want to buy stocks, meaning prices will increase.
Natural and factors
What many people tend to believe is that natural disasters only affect the stock market because of the great number of life losses or the huge damage-repair costs. In reality, the economic aftermath is much bigger.
Hurricanes are considered amongst the main natural factors that influence the market because it does so in two different ways. On one hand, in areas where hurricanes are predicted to happen, stocks may decrease in price, precisely because people are looking to sell more.
An example can be the case of Hurricane Katrina, that entered through the Gulf Coast, where a large number of refineries were located. This resulted in a decrease in oil and gas supplies, which led to increased prices. This affected the transportation industry, which was forced to spend more and reduce their earnings.
On the other hand, in such areas where natural disasters are happening often, insurance companies are thriving, simply because people need floor or hurricane insurance. This means that investing in insurance companies will always turn out to be profitable in such areas.
Last, but not least, no matter the reasons above, the majority of price swings in the market happen because traders make certain decisions. So, in the end, it is the psychological factor that affects the market so significantly.
There are some periods in the market when everyone wants to buy, which means prices will increase significantly, but there are also moments when people get scared for certain reasons and decide to sell massively. These decisions have both short- and long-term effects. The short-term effects revolve around prices increasing or decreasing significantly. Long-term effects happen in the case when traders make poor decisions to sell massive, at a low price, because of potential risk signs, but it turns out that, in the end, the company ends up making a profit.