Money

What Factors Can Determine the Price of Stocks?

The stock market can provide you with an abundance of investment opportunities, making it possible for you to trade in financial instruments such as shares, bonds and derivatives. For this reason, the size of the market is ever-increasing, with more and more individuals deciding to open positions. If you’re considering investing in stocks, it’s important that you’re fully aware of the risks involved before you get started.

The stock market is highly reactive to internal and external factors, which are completely out of your control. Stock market volatility presents great opportunities for investors to profit, but also poses great risk of losses, if you don’t manage your investment strategically. There is an array of factors that can drive the price of stocks, so it’s important that you familiarise yourself with these before you consider opening a position. To help you to get started, here’s a list of some of the factors that can affect stock prices.

Supply and Demand

It’s a pretty simple concept really, but if there is a reduction in demand for a particular item or service, this should result in a reduced supply of that commodity or asset associated with the shares of the relevant company. As soon as there is an imbalance, and demand outweighs supply or vice versa, prices of that stock will either surge or drop. For example, if a particular trend has caused a high volume of people to buy an item, there is a high demand for it, which will likely result in a reduced supply and an increase in price, because of the desirability of that good and its relation to the overall value of its producers.

Inflation and Interest Rates

The disposition of some of the global giant’s economies has a direct and significant impact upon the stock market. Two specific economic factors which can have a direct effect upon stock prices are inflation and interest rates. Interest rates of America are regularly adjusted by the US Federal Reserve, who meet eight times per year to discuss changes to monetary policy. This is known as the Federal Open Market Committee (FOMC) meeting.

Since these meetings are periodic, by employing an economic calendar, when stock trading on Plus500, for example, you can plan ahead for any adjustments that could affect stock prices. 

In the FOMC meeting, interest rates can be raised, which could result in fluctuations in the stock market. This is because, when interest rates increase, consumers and businesses will reduce their expenditure, causing prices in the stock market to fall. Alternatively, if interest rates are reduced, expenditure will increase and stock prices will rise.

Inflation and interest rates are directly linked. This is due to the fact that inflation is an increase in the price of goods over a certain period, and this increase in cost can result in global banks raising their interest rates. This strategy can cause a deceleration in inflation however, it can also affect the prices of stocks.

Global Events

International, unprecedented events can have a detrimental impact upon stock prices and place investors in a difficult position because these events cannot be planned ahead for. Warfare, natural disasters and pandemics, for example, can all drive stock prices because they create social uncertainty, and can affect the economic and political structure of a nation.

For example, the COVID-19 pandemic initially saw stock market prices plummet, driven by fear. On the 19th February 2020, amidst pandemic uncertainty, the market plummeted by 34% in just 33 days. However, as the pandemic went on and multiple lockdowns occurred worldwide, a change in spending habits saw certain sectors boom, such as e-commerce stocks.

Market Sentiment

Psychological factors can have a huge impact upon the stock market, and collective individual’s beliefs and predictions can completely alter the landscape of stock prices. This is referred to as market sentiment, which is the effect of groups of people within the market who are following suit, based on a feeling or a belief that prices will move, which in turn, causes prices to fluctuate.

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