Volatility is one of the key features of the stock market. This is why stock prices are always fluctuating. Hence, stable returns are unheard of in the stock market. The volatile nature of the stock market could be attributed to two key factors, and the same could be said for individual stocks. At their crux, the two main factors affecting stock prices are—demand and supply. When there is demand for stocks, their price appreciates as more buyers are looking for investment opportunities. Conversely, when there is an excess of supply, there are more sellers and stock prices fall. Read on and learn more.
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Factors Affecting the Stock Market
There are a myriad of factors influencing demand and supply in the stock market. It could be the result of changes within the company, or it could also be the result of developments at the macroeconomic level. It’s worth noting that the magnitude of demand or supply also varies; it could last from a few days to several years. Hence, as a stock market investor, it is essential to look beyond demand and supply and understand the nuances. Let’s take a closer look at some of the major factors influencing the stock market and stock prices below.
Fundamental and Business-Related Factors
Fundamental and business-related factors are generally specific to the company or the industry and deal with the financial performance of the company. In the case of fundamentals, the company’s earnings growth is one of the primary elements affecting the price of the company’s shares. When the company shows promise to deliver strong earnings growth for a sustained period, that company becomes the market’s darling, and investors flock to buy its shares. On the other hand, when there are signs of muted earnings growth or degrowth, investors tend to sell the company’s shares, resulting in declining stock prices. There are multiple reasons why a company may see its earnings grow or decline.
- Increased demands for the company’s products/services, the introduction of new products/services, expansion into new markets, improved operating efficiency, etc., are some of the main reasons for a company to witness growth in its earnings.
- On the other hand, a fall in demand for the company’s products/services, poor management execution, increased costs of raw materials, a loss of pricing power, etc., can result in earnings degrowth. A fundamental factor can impact demand and supply for years, and the stock price could see a long uptrend or downtrend.
News and Rumours
News/rumours about a stock can also positively or negatively impact its price. For example, when news breaks that a renowned investor or institution has invested in a stock, one might witness the stock price for the next couple of days. On the other hand, if reports of tax fraud are circulating in the media, the company’s stock price may take a tumble, even if there is no concrete evidence. Lastly, some news reports can sway the stock price in either direction depending on how the market views the report. For example, a potential strategic merger or acquisition could have a positive or negative impact on the stock price.
News and rumours about a company may induce fear in its investors, causing them to panic and act hastily. However, news and rumours only impact the stock price for an extended period if they impact the company’s fundamentals.
Economic Factors
Changes in the economic environment can influence the sentiment of the entire stock market. GDP growth predictions, consumer price inflation, interest rate hikes, and employment rates are some major economic factors affecting the stock market. If a country’s GDP is expected to witness strong growth due to increased manufacturing capabilities and exports, companies catering to said industries may see their stock price do well. On the other hand, fears of recession or fears of interest rate hikes may negatively impact the broader market.
Government Policies
Government policies like production-linked incentive (PLI) schemes, taxation policies, anti-dumping duties, and budget spending are also noteworthy factors affecting stock prices. For example, the Indian Government has introduced several PLI schemes to local manufacturing of electric vehicles, textiles, electronics, and so on, which have provided numerous growth opportunities for several companies, as reflected in their stock prices However, policies like a hike in the windfall tax on oil and gas companies can negatively impact the stock prices of such companies.
Political Factors
On the surface, one might think that politics is not a very consequential factor influencing the performance of the stock market. However, that’s absolutely not the case since politics is responsible for a significant number of economic and trade reforms. For example, if a country proceeds to act against the consensus of its global peers, that country may see its exports sharply decline. That decline in exports may reflect the poor performance of the sock market in that geography. Likewise, during elections, governments may increase their spending and introduce PLI and infrastructure schemes to boost economic growth and win the favour of the public. The PLI and infrastructure projects may benefit companies, which is reflected in the stock market. The ‘China+1’ trend can also be attributed to political reasons that helped industries in countries like India.
Black Swan Events
Black swan events include those rare, unforeseen events or predicaments that may severely affect the stock market. Prime examples of black swan events include the 2008 financial crisis in the US and the Covid-19 pandemic. Such events have the potential to induce immense panic among investors, and investors rush to pull their money from stocks, leading to stock market crashes. FII DII data serves as a widely-used trading indicator, aiding in significant trading decisions in one’s favour.
Conclusion
The above were some of the factors that affect the stock market by swaying the sentiment of investors towards assets like stocks. Additionally, these factors are also responsible for bringing in foreign investors and influencing exchange rates. All put together, such factors impact the curve of demand and supply in the stock market.
