9 Factors that affect the Share Market Prices

How Prices Move in Stock Market: Top Determinants

Share market is hugely connected to a nation’s economy and is the national building pillar of countries. The market lists prominent companies to allow public funding through stocks, and thus, is primarily influenced by public sentiments. However, dozens of other market factors can alter the prices, and for any trader, whether potential, short term, or long term, it is of utmost importance to be aware of those determinants. These can help give you an edge over other novice investors who go with the sentiments flow and end up losing.

Here we’ll discuss the top factors that majorly affect the market, but there could be other determinants.

Top Factors affecting Share prices in the Stock Market

Supply and demand: Although there are so many technical and other factors which affect the stock market prices, supply, and demand are the most basic ones. The foundational ideology is if a product is demanded more by the public and is limited in supply, then the price would automatically rise and vice versa. Similarly, the case is valid with shares; if a stock is demanded more, the share prices skyrocket.

Political Situation: Political situation of a nation is a significant factor affecting the share market. Investors and traders generally prefer politically stable countries after all political imbalance signifies uncertainty about that economy’s future. Notably, if a nation witnesses frequent political parties’ changes, then the situation is not favourable for the market. For reference, if a pro-fiscal growth party wins, they would benefit the economy by attracting FDI and thus benefiting the market. Similarly, if an anti-growth party wins, then it works to degrade the market.

Finally,s the administration takes significant decisions, invests funds on the nation’s growth, and makes good reforms.

Interest Rate: Interest rates determine how much ROI a lender would be taking home on his spending, i.e. return on capital. The reserve bank of a nation generally sets the interest rate. Now, how interest rates affect the market?

A surge in interest rates would not be favourable to companies as they now need to pay more interest on the money lent from banks, thus, degrading their earnings. Similarly, lower interest rates upgrade profits.

Speculation: It is an indirect factor which affects share prices. The stock market is volatile and fluctuates quickly and easily by events & news. For example, if the information regarding a particular stock flows in the market, that specific share would be primarily affected. The rates will plunge if there are any terrible predictions for any company. Thus, sometimes pseudo-news are also released into the market by big influencers to make profits.

Inflation: Inflation means an increase in rates of products and services in a nation. Inflation and interest rates are interconnected. An increment in interest rate would slump the inflation.

The inflation percentage of an economy has a significant effect on foreign investments and thus on that nation’s stock market. More inflation is generally not attractive to foreign investors as it drags the PPP (purchasing power of people) of an economy.

Further, high inflation means fewer products would be available to the people for a particular sum of money.

However, note that the interest rate is not the one thing which affects inflation.

Economic growth: Good Economic growth of a nation signifies more production, more demand and supply, and higher national income. It is generally measured as GDP. Right growth in a country also suggests the absence of any uncertainty in an economy.

High growth means more and more companies in the market are growing, affecting the market rates and vice versa.

P/E Ratio: Many experts and analysts believe that a healthy P/E is a good indicator for long term growth. Moreover, if a firm is witnessing higher P/E than the historical average, then the chances are that the company is overvalued today, with firm hopes for a correction.

Natural Calamities: Natural catastrophes such as flood & earthquake majorly affect the share market. These calamities make a significant loss to the buildings and other infrastructure of an economy, which then causes loss to the firms and thus, the market. Output, production, manufacturing, and other operations come to a halt due to these destructions.

Gold Bonds & Rates: Gold rates and bonds have an unexplained relationship with stock market prices. Usually, a negative correlation between the yellow metal prices and shares is observed, with more people using gold as a safe asset in the stock uncertainty period. When the financial crisis of 2008 was hit, gold increased significantly and witnessed high growth during the depression in the market.

Top Stock Brokerage Firms for Stock Trading

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The Bottom Line

So, these were the most prominent factors affecting the market significantly. There are other affecting elements too, but these are the primary determinants. Moreover, many factors are mentioned affecting the overall market and not just stocks. For instance, interest rates negatively influence the market but are favourable to currency pairs.