It would be challenging to find an individual who would disagree that inflation has a crucial role in reducing the value of our savings and creating obstacles to meeting our financial goals. In such conditions, making prudent investment decisions becomes vital. Investment is nothing but putting your money to work and generating extra income. It not only helps you attain your financial goals but also provides financial security. Numerous investment tools are available in the financial market, such as stocks, bonds, gold, real estate, etc. However, investing wisely in the stock market is one of the best ways to generate wealth.
Before investing in the stock market, it is recommended to find answers to questions like:
- What are the factors affecting stock markets?
- How do factors affecting the stock exchange affect your returns?
If you seek answers to these questions about the stock market, you have landed at the right spot!
What is Stock Market?
The stock market or share market is where stocks, shares, and other financial securities are exchanged. It is considered a part of the free-market economy, allowing the investors to benefit through capital gains and adds to the country’s economic growth. Stock market investments can be risky owing to the market fluctuations, but the payoff is also higher than other investment tools. However, one can invest wisely with a diversified portfolio to minimize the loss. Therefore, it is only fair to understand the factors affecting the share market.
What are the Factors Affecting Stock Market?
Knowing what stock market is not enough. To earn returns you should also know about factors affecting stock market returns. Here they are:
Supply and demand
One of the main factors affecting the share market is the imbalance between supply and demand which leads to the increase or decrease in the price of stocks. In addition, factors such as economic data and interest rates affect the demand for stocks leading to fluctuations in the value of stocks.
Interest rates
The governing body, the Reserve Bank of India (RBI), regulates interest rates, directly influencing the price of stocks. When the interest rate is low, the companies can borrow a considerable amount at a lower interest, resulting in their profits due to an increase in the stock price. On the other hand, higher interest rates lead to lesser profits and reduced stock prices.
Political factors
There have been multiple political factors affecting stock markets. For instance, the price of stocks goes down in case of risk of war, weak government, public outrage against the government, etc. Budget announcements or elections significantly impact the volatility of the market, affecting the stock prices. Moreover, the new government policies introduced regarding the Indian economy can affect the share market. In addition, the value of stocks is also reduced in case of riots or political turmoil in the country.
In addition, there is also a possibility that stock market(s) and traders respond in a biased manner for right-winged government, as compared to the left-winged.
Natural calamities
Natural calamities and pandemics such as floods, earthquakes, and pandemics such as Yellow Fever, Ebola and the recent COVID-19 one too, can drastically affect the value of stocks. Due to the stock prices are bound to fall due to the destruction of property, finances, and other assets. It affects not only a company’s performance but also people’s capability to spend.
Inflation
Inflation directly affects the finances of people resulting in reduced capacity to invest. Moreover, increased inflation rates discourage people from investing, making companies suffer. Hence, inflation has a critical role in affecting one’s investing power, purchasing power, and the country’s overall economy.
Conclusion
It is worth noting that investment includes risk, but it can be minimized if the investment is backed by sound knowledge and research. Stock prices are driven by numerous factors such as interest rates, natural calamities, political factors, etc. Therefore, one should consider the factors affecting stock markets and allocate their assets accordingly. The proper allocation strategy will not only yield higher returns but also mitigate the risk involved.
