When deciding on where you should start trading stocks there are many things to know about how the market works. This includes numerous outside forces affecting the stock market. The stock market is an incredibly complex sector, but one you can understand with a keen eye. You should keep in mind that although the market is controlled principally by economic factors, these factors represent something far more tangible. They represent people’s opinions, wants and needs. Behind every economic trend, there are practical comprehensible decisions being made by people. The economic data is merely an abstraction of these actions.
Having said this, we should still take a look at just how these factors manifest themselves and their exact causes.
Investors’ perception of the market, microeconomic influences on the stock market
Various events can occur to affect the perceptions investors have on a particular stock. First of all, the performance of a company can be of the utmost importance in deciding how the price of a stock will change. If a company is doing well, i.e, they are marking profits or are making greater profits, prices of a stock can go up. If a company is doing badly, i.e., lower or negative profits, prices of a stock will go down. The lower the profits of a company, the lower the dividends paid to the investor, so the value of the stock decreases.
Investors can usually check a company’s performance by analyzing their financial statements. These could be the balance sheet (the liabilities of a company) or an income statement. These could be found in a quarterly report. This is a type of report that is required to be published by law for certain popular companies. It can give those analyzing the data the necessary information they need to further expand on it. They can then publish indicators like the EPS (earnings-per-share), P/E (price/earnings ratio), or the PEG (P/E against Earnings growth).
Essentially, the stock market functions on supply and demand. From all this information, traders will decide to invest, continue investing, or sell their stock. If they are desperate to sell their stock, they will lower their prices. If they are desperate to buy a stock, the seller will raise their prices accordingly.
External Indicators of a market
Additionally, the information gleaned from news outlets that could affect a company’s profits are of relevance. This could be how a particular industry is doing, or any public controversies the company (or the company’s employees) is involved in. If there are indications that consumers will spend less in a particular industry, it is relevant information. If a company employee behaves inappropriately, consumers may want to direct less revenue their way out of principle.
Furthermore, investors tend to follow trends. They closely follow stock charts to give them a quick indication of how a stock is currently doing. If the value of stock takes a downturn, investors will become hesitant. Some investors will then sell stocks, meaning the value of a stock will decrease further. This pattern continues until investors gain confidence in the company, at which point prices will level out. The same works in reverse, if an upward trend takes place.
We have now essentially covered the micro-economic factors on the price of a stock. These relate directly to how investors react to news surrounding a particular stock. We will now have to cover the macro-economic factors affecting the stock market in general.
Macro-economic influences on the stock market
Many things that could influence the price of a stock or the market in general, are completely out of a company’s control. Here we shall discuss worldwide events that could shape the stock market.
When the prices of goods and services increases within a country, the currency of the country devalues accordingly. This is called inflation. This could be a good sign that an economy is growing, as people earn more money the prices of goods and services increases. However, it could equally be a sign that an economy is doing badly. As the supply of certain goods is lower and the demand stays the same, like food, prices rise. The first scenario will likely be slow, controlled inflation. The second scenario is fast-paced and quickly gets out of control. So the inflation of a currency is an indication to investors on whether they should keep investing. As long as inflation is low, there is nothing worth worrying about.
It should be noted, however, that inflation is not an accurate reflection of an economy. Governments have the ability to control the apparent inflation of a country for their own needs. So wise investors will be careful before making any sudden moves and analyze the situation properly.
Interest rates closely follow the inflation of the currency. Once the inflation of currency changes, interest rates will move in the same direction. As those giving out loans or renting out an asset become insecure, they raise their interest rates to ensure profits. Higher interest rates mean that people will likely spend less, as their expenses will obviously be much greater. As they spend less, companies dependent on consumer spending will suffer losses. Then there’s the fact that their current assets will also be worthless. Since the currency valuing them is itself less valuable. These two factors will spell a downturn for the price of a stock.
The Importance of Oil
The supply and demand for oil are tied with economies worldwide. A huge number of industries require oil. This includes transport, heating homes, and energy and countless more. Since oil is such an enormous and valuable market, it can easily affect these economies. All of these industries can be affected by the availability of oil. As companies dependent on oil make lower profits, more people are let go. As fewer people are employed it follows that they will, of course, spend less. The direction at which the price of oil moves is therefore usually an indication of how every stock will behave.
This is why many investors keep a close eye on news surrounding oil. In particular, they will keep a close eye on countries known for oil production. This could be Iran, Saudi Arabia, etc. The political situation of these countries, or news surrounding their oil industries, are of the utmost importance.
News on Supply
The industry could be heavily dependent on one specific resource. If that resource starts becoming scarce, it could mean lower profits for a company. This could be because of bad harvests, or because the resource is being restricted. Or simply because there is just less of it available. Investors will then become skeptical about whether a particular stock is worth investing in.
Political Concerns for the stock market
This leads us to our final point. As the famous saying goes, no news is good news. The political events concerning a country can have effects on their future behavior in trade. These events can heavily affect the state of many industries. Maybe the country declares a trade war, or maybe a new policy will spell doom for a particular industry. As companies do worse, the prices of their stocks will of course lower.
So, as you can see, the factors that could affect stocks are numerous. They do, however, quite intuitively and closely reflect what happens in the real world.