8 Factors that Affect the Stock Market – Investing 101

Last Updated on December 7, 2023 by BFSLTeam BFSLTeam

Any investor looks for the single most important thing they want from their investment. This is profit or returns. When you invest in the stock market, for instance, you may want quick returns, but this may not always be possible as the stock market is affected by various and diverse factors. Although you cannot wipe out risk with your stock investment entirely, if you make educated decisions regarding your investment, you can certainly mitigate your risk. 

So, if you know the key factors that potentially take stock prices up or down, you may make appropriate decisions based on these factors. It is important to understand eight factors that affect stocks and can motivate your decision to invest in stocks. Before that, you should know what the stock market itself is. 

What is the Stock Market?

You could think of the stock market as a very large bazaar, where you can buy and sell the shares of companies. The stock market allows the general public to make transactions in the shares of stock of companies. When you buy shares of a particular company, you own a portion of the company by way of the shares you purchase. Consequently, this makes you a company shareholder. Due to the fact that the prices of different stocks keep changing, the stock market can be called volatile. Nonetheless, there are certain factors that influence share price fluctuations. What are these? There are several, but you can go on to read about 8 of the key factors that affect stocks. 

Factor #1 – Economic Factors

You could call economic indicators “signals” that give you clues about the health of the economy in general. Indicators related to the economy are the GDP rate of growth, the rate of growth of inflation, industrial information, and employment data. These are the fundamental indicators of an economy’s positive or negative growth. If economic indicators are on the positive side, the stock will be too and share prices will likely be up. If the opposite is the case, there will be a downward trend due to uncertainty. For instance, if the GDP rises and unemployment falls, then investor confidence increases, and the prices of stocks rise too. 

Factor #2 – Corporate Earnings

When you wish to buy or sell the shares of a company, the company’s overall performance may affect stock prices. If a particular company, say, releases a robust report of its annual performance, then the stock of that particular company tends to go up. This is why investors regularly monitor annual and quarterly company reports, as well as any specific announcements made by a company.

Factor #3 – Political Events

Government policies and decisions, as well as election results, can have an impact on the price of stocks. For example, before an election, results may be uncertain. At such times, stocks may fluctuate and investors remain cautious. However, when a stable government is established, there is less unpredictability and stocks may rise then. 

Factor #4 – Interest Rates

Interest rates are controlled by the central bank of India, the Reserve Bank of India. If bank interest rates fall, then returns on investment in certain fixed-income instruments fall as well and the stock market appears more appealing in terms of lucrative returns. At such times, stocks may rise in price as there is a demand to invest in shares.

Factor #5 – Global Events

Global downturns, geopolitical events, and natural disasters all affect the stock market. For instance, during the peak of the Russia-Ukraine crisis, markets around the world hit lows. Now, with the Hamas-Israeli conflict, stock markets are on the bearish side again. 

Factor #6 – Policies of the Government

Policies adopted by the government directly affect the stock market. For instance, if the annual budget announces a rise or fall in taxation, this affects businesses and the economy in general. Say, if tax cuts are introduced, then this means that businesses can save more and earn more profits. This makes their company stock go up. In another example, if the government announces an aggressive policy on infrastructure development, then the stock of related companies will tend to increase in price.

Factor #7 – Performance of the Company

The performance of any stock is directly connected with the company from where it has its source. Companies that are listed generate quarterly and annual reports showing the results of their companies’ performance. If a company reports strong results in terms of revenues, profit, etc., the stock price of that company tends to rise. 

Factor #8 – Market Sentiment

Investor sentiment is driven by the way investors make predictions about the prices of stocks. Investor sentiment implies the mood of investors and while this may be purely subjective, it influences the prices of stocks. Say, if investors are more inclined to invest in a particular sector, stocks in that sector may be in demand, taking their prices up. 

Be Wise, Be Educated 

While investing in stocks, it is vital that you consider your risk tolerance, economic factors and other factors, and your unique financial goals. No one, even the most savvy investor, can predict the why what whenway in which the stock market is headed. However, by grasping particular factors, you will be able to lessen your risk and make informed decisions.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only.