To understand key factors affecting stock prices, it is necessary to know how stock prices get affected in developed and developing economies. It is requisite to look at the relationship linking stock prices and internal and external factors affecting it.
Firstly, it is imperative to look at “Company Fundamentals”. These particular factors affect that affect stock prices majorly. There are two prime company fundamental factors:
- The institutional factor of the company/firm
- Nature of the business of the company
Secondly, it is preferable to inspect and monitor the below-mentioned factors:
- Boundaries of firms,
- Organizational success,
- Governance mechanism,
- Ownership pattern and changes,
- Auditing and growth
- Accounting information’s relevancy in terms of value creation for the firm and the stockholders
Hence, many factors can cause the fluctuation of stock prices and bring turmoil or upheaval trend in the stock market. From the general news about the earnings of companies to the investor’s view and expression of feeling about the stock market; stock prices get affected.
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Few Macroeconomic Factors That Affect the Developed Economies
1) Interest Rates
In the developed economies of the world, interest rate primarily affects the stock market. The hike in the rate usually means that the borrowing has become expensive/costlier. Here, lower profit margin= fall in prices of stock= causing the market to a dropdown.
Whereas, a cut in the rate would mean that money has now become available at cheap rates= causing an increment of the money flow in the economy. Henceforth, lower the cost= higher the bottom line of the company= causing the stock market movement to fly high.
Though, sometimes, a rate cut wouldn’t lead to a market fall.
2) Inflation in Goods and Services
Inflation means the price of goods and services has risen. For example; In the United States, Core Consumer Price Index is utilized for the measurement of inflation, excluding food and energy-related products of the US market. Usually, when inflation has risen, the market has fallen. This inverse relationship brings shakiness in the market because of a reverse relationship between the two. Having said that, deflation has also caused the market to suffer. It is one of the prime factors causing economic problems. However, Stock market experts internationally believe that inflation when is at a desirable rate for the market plays a positive role and is good for the market. This is because the stock market analysts believe that stocks have, what they say, “real value” during inflation.
Having said that, it is also known that inflation decreases the purchasing capacity of buyers. Though, the impact of inflation can considerably be managed in the portfolio. It can be reduced to some extent.
3) Gross Domestic Product
The value of finished goods and services in the country, “GDP” supports the stock market by showcasing signs that are positive for the investor. This is because GDP indicates that the country is progressing and the companies are growing. Whereas, if the GDP falls, then the confidence of the investor falls too, which in turn would cause the stock market to shake and fall.
4) The Rate of Unemployment and Rate of Hiring
If the people in the country are earning and everyone’s employed; this means people are satisfied enough to invest in the stock market. Since the stock market is a risky place, people need to have the confidence to invest in the stock market. The rate of unemployment is the strength showcase of any country’s economy.
Other than the unemployment rate, it is equally important to consider the hiring rate of employees in a company. If companies are hiring, then this means that the companies are prospering. Investors in developed economies look at these two important indicators to determine investment decisions that affect the determination factor concerning stock market movement.
The unemployment rate should never be more/higher than expected as it is a factor that causes the confidence in the economy to lag down. The expectation of higher sales by investors, resulting in higher profit, makes the stock prices move high. Hence, also to increase sales, hiring and employing play a major role.
5) War Of The Trades
The trade war make imports very expensive because of high taxes. This depends on the country that is importing. Companies during the time of trade wars decide whether they want to pass the excess cost levied in the goods and services to their customers or not. The increase in import taxes become very difficult for countries that are importing goods and services; because it affects the buying and selling cycle. As the price increases, the buying slows down which in turn slows the economic growth of a country.
This directly affects the profit margins of companies. As a result, investing decisions get affected and customer trust becomes tremulous. Yet, trade wars do not last long, so, the effect on stock prices can be temporary.
6) Industrial Output And Fiscal Stimulus
Strength can be measured through industrial output and fiscal stimulus. The economic condition is determined by considering the industrial output as it is important. This is because of the industrial indicator. The industrial output doesn’t consider the price that has been added by the retail sector.
Stock prices are determined/set on flow in the marketplace where the seller’s supply coincides with the demand of the market. Nevertheless, as much as there is a discussion about factors affecting stock prices; there isn’t any clear equation on the behavior of stock prices. The behavior pattern of stock prices is never certain. Though, the forces of the stock prices can be determined if analyzed as per:
- Fundamental Factors
- Technical Factors
- The sentiment of the stock market
The stock market has been a prioritized center for economies for many years. This makes it very important in terms of determining the economic condition for countries. Any sort of instabilities in the stock market has a negative or positive impact on the economy.
Thus, policymakers and economic analysts also carefully watch stock market trends.
Fluctuations in the stock market are also the cause of political affairs in countries.
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Similarly, if we see the stock market determinants in terms of developing countries (Nepal) particular, (yet, by understanding the developed economies), the following factors can affect the stock market:
Factors Affecting the Stock Market Conditions in Nepal (Particularly):
- Policies of Nepal Rastra Bank
- Decisions of SEBON and its interference or check and balance procedure
- Inflation and Deflation
- Social media wordplay and marketing gimmicks
- The liquidity position of Banks
- Media advocacy
- Dividend Capacity of Companies
- Political Instability
- Estimation of future earnings of companies
- News releases and political statements
- Political changes
- New product introduction
- Large contract achievement and starting of halted projects
- Change in Companies’/ Bank chiefs
- Merger and acquisition that is anticipated to happen or happens
- Any kind of scandals
- Change of organizational management procedure
- Errors in accounting procedures
Henceforth, there are a lot of factors that affect the stock market and stock prices. Nevertheless, there are other particular factors that affect the stock prices in general, be it in terms of Nepal or in developing countries.
Causes of Stock Market Rise and Fall in Developing Countries (Particularly):
1) Performance Of Industries
The stock prices of companies from the ”same industries” are in sequence with each other. This is because the conditions of the market “ usually” affect the companies of the same industry in the same way. Though, sometimes even slight, mere, or little unwanted news about a company (competitor) of the same industry will affect the stock prices in the same market.
2) Sentiment Of Investors
As mentioned in this article earlier, the sentiment of the investors can make the stock market fluctuate, which in turn can cause the prices of the stock to go up or move down. This is because of “the direction phenomenon of the stock market” causing the movement of the stock prices to move along.
It is known that in the stock market, there are two types of markets:
- Bull Market: A market that is so strong that the stock prices rise which in turn increases the confidence of investors.
- Bear Market: This market is very weak as the stock prices continuously fall. It should be known that during the time of recession, in the condition of unemployment and hike in prices of goods and services, the stock price falls which creates a bull market.
So, when stock price signals fall, check on the country’s economic status at that particular time (in a larger perspective) and see through the unemployment rate (for a detailed perspective). A falling (Bear) Stock Market shows:
- A decline of 20% or more in prices in the market
- When a change in tax rate takes place
- A buzz among investors that there might be a bear market approaching. “It is all in and because of the mind” because a thinking mind can take action.
- During the time of Financial Crisis or a Pandemic
3) Rate of Interest (Interest Rates)
The Banks can raise or lower the interest rates as allowed by the Central Bank. This can affect the economic condition of a country as it also touches the economic policy. The cost of the debt will get affected if a company borrows money for business expansion, resulting in a decrease in company profits and dividends. This causes the stock prices to drop.
Also, a higher rate of interest will make the investors put their money in Banks rather than investing in stocks.
4) The Economic Outlook in a Nation
If it starts to seem like, the economy will improve because of the appointment of the Central Bank’s Governor, or Minister of Finance, or any other reasons, then the stock prices start improving. This uncertainty will create speculative energy of willingness to invest and earn and try out luck.
5) Economic Policies’ Changes
A new Government may lead to changes in inflation and interest rates. There might be some business favorable economic policy changes and some unfavorable and unnoticed as well. These sorts of changes in economic policies may uplift the stock prices or decrease the stock prices depending upon the type of change.
6) Political Turmoils And Shocks
Whether it is a change in political dimension at a world level or a change in political candidacy at a local level, political changes and a shocking one does create changes in stock prices.
For example, a terror act can bring down the stock price.
7) The Value of Native Dollars and Rupees
A lot of goods and services are imported and many are exported. If the Dollar or Rupee rises, then the customers will have to spend more money. This will bring the sales down and which may bring the stock prices down also. Though, when the Dollar or Rupee of goods and services falls, then the customers can start purchasing more, which increases sales and also increases the stock prices.
8) Inflation and Deflation
Inflation and Deflation affecting the stock prices is a universal trend. Inflation means the consumer prices are higher whereas deflation means less or lower profits for companies. Both of these will affect the countries’ economic conditions.
For example in the case of Deflation, Interest rates might be lowered to encourage people to borrow more from banks and financial institutions.
Conclusion: How To Deal With Factors Affecting Stock Market?
Hence, various macroeconomic, microeconomic factors need to be well analyzed to understand factors affecting stock prices. Factors affecting the stock market are usually interrelated. Thus, analysis of each factor on a weekly basis, if not on a daily basis, is necessary to be on track of the possibility of increment in stock prices and decrease in stock prices.
The main point to understand regarding stock prices is to get the track and direction of increment and decrement of macroeconomic and microeconomic factors touching the stock market directly or indirectly. A Financial Analysis, Economic Analysis, and Technical Analysis, all should be understood well. Though, the “vastness factors” affecting the stock market can be understood only by strategic analysis of movement, mind, and magical nodes connecting the people, place, and phenomena.
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