What makes stocks go up and down
Now It is time that you try to understand the factors which influence the stock market.
Once you get clarity about these factors, as an investor you would be in a better position in deciding when to increase your stock market investments and when you should start
booking profits. Some of the important factors which influence the stock market are explained below –
1. Domestic Economic Factors:
Stock prices generally move up when there is an expansion of the economy and they move down when there is a recession in the economy. So it is always advisable to start by
analyzing the economy.
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We can come to know about the overall state of the economy by looking at various economic data points like GDP Data, IIP Data, Consumer Spending Data, Forex
Reserves of the Country, Fiscal Deficit, Trade Deficit, etc.
Improving GDP Growth Rates, Improving IIP Data, Increased Consumer Spending, Increase in Forex Reserves, Reduction in Fiscal Deficit and Trade Deficit, etc can be some good indications of improvement in the economy. Looking at just one quarter or one-year data won’t help much, investors must look at a longer-term picture.
2. Global Economic Outlook:
Today because of trade globalization, the Indian economy is more exposed to global markets than ever before. Hence apart from the domestic economic outlook, global economic trends also have an impact on the Indian stock market.
Today many Indian companies are exporting their products to global markets, raising funds from international markets, listing securities on foreign stock exchanges, etc. Therefore, the share price movements of such companies are more likely to be affected by the development of the world the economy as well.
3. Geopolitical Factors:
Stock markets in general can be affected by unfavorable world events such as war and civil unrest, political unrest, terrorism, natural disasters, etc.
A sense of panic gets created in minds of investors and traders and they either start dumping stocks or refrain from investing in them this leads to a severe correction in the market.
The effect of such geo-political factors can be direct and indirect, and they often occur in chain reactions.
4. FII Outlook:
Being a developing country, India attracts a lot of foreign capital in form of Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII).
FDI is considered a more stable form of foreign capital as compared to FII. But, FIIs inflows and outflows have a direct impact on the stock market.
In the Indian context, Foreign Institutional Investor (FII) means an institution established or incorporated outside of India that proposes to make investments in securities in India.
They include foreign entities pension funds, mutual funds, insurance companies, investment trusts, investment banks, asset management companies, foundations, university funds, endowments, sovereign wealth funds, hedge funds, charitable trusts, investment managers, advisors institutional portfolio managers, etc.
Whenever the outlook of FII on the Indian economy becomes negative they start withdrawing their investments from the Indian market and hence there comes a correction in the Indian share market. Conversely, when their outlook on the Indian economy becomes positive they increase their investments in the Indian market and as a result, the Indian stock market soars.
5. Agriculture & Monsoon:
Agriculture and Monsoons have a great impact on the overall economy of our country. Roughly around 70% of India’s population, directly or indirectly depends on farming. Around 60% of total employment in the country is through agriculture and most importantly the agricultural sector contributes about 17% to the total GDP of our country.
A major portion of the country’s crop area is completely dependent on monsoon rains as they are not equipped with methods of manual irrigation and hence monsoon is important lifeblood of the Indian economy.
A normal or good monsoon ultimately lifts rural incomes and boosts spending on consumer goods and the rural housing sector. It also keeps food inflation under control.
On another hand, a deficit monsoon or a drought-like situation ultimately results in poor rural household incomes, reduced consumption, and slower economic growth. It also leads to a significant increase in food inflation.
A poor monsoon not only leads to weak demand for fast-moving consumer goods, two-wheelers, tractors, and rural housing sectors but also increases the imports of essential food staples and forces the government to take populist measures like farm loan waivers, thereby putting further pressure on finances.
Further, as many as a dozen sectors depend on agriculture and monsoon, either directly or indirectly. These mainly include companies that either depend on agriculture for their raw materials or they supply inputs to the agricultural sector.
Inflation is the rate at which the general level of prices for goods and services is rising and consequently, the purchasing power of currency is falling.
Inflation causes a rise in the prices of energy, food, commodities, and all other goods and services. This in turn impacts the cost of living, the cost of doing business, borrowing money, mortgages, corporate and government bond yields, and hence affecting the entire economy.
If inflation is controlled and at reasonable levels, the economy may prosper resulting in an increase in the stock market but when inflation becomes too high the economy starts to suffer resulting in a decline in stock market indices.
7. Interest Rates:
Interest rates are directly linked with the state of the economy and inflation.
When the economy is expanding, consumer confidence and spending increase and it often leads to inflation to control inflation, central banks often hike interest rates. Similarly, when the economy is contracting, consumer confidence and spending reductions and it often leads to deflation or a reduction in inflation under such circumstances central banks often reduce interest rates.
Increases in interest rates have a negative impact on corporate earnings as well as consumer spending. This eventually leads to a cooling down of the economy. On the other hand, a reduction in interest rates has a positive impact on most sectors and it also boosts consumer spending which eventually results in growth in the overall economy.
Stock markets, generally don’t like high-interest rates. Hence normally during the rate hike cycle, there is a bearishness or downtrend in the stock market while during the rate reduction cycle stock markets tend to turn bullish.
8. Foreign Exchange Rate:
Appreciation of the Indian Rupee makes imports cheaper and exports costlier while the depreciation of the rupee makes imports expensive and exports cheaper. Hence for an economy like India, which exports fewer goods and is largely dependent on imports, especially those like oil and gold, currency depreciation could be troublesome.
When there is an appreciation of the Indian Rupee, Foreign investors make money in terms of forex gains and hence they prefer investing more in India when they think the rupee is going to appreciate in the coming time.
But on another hand when the rupee starts depreciating they tend to lose money in terms of forex losses and hence they tend to move out or sell their investments in India before the currency depreciates further.
9. International Crude Oil Prices:
India produces only 15% of the oil it needs, so it has to import the rest 85% of it. Currently, India roughly imports 4.9 million barrels of oil per day. Hence global oil prices have a significant impact on the Indian economy.
Higher crude oil prices not only result in a widening of the current account deficit and fiscal deficit but they have various other spillover economic effects. It causes rupee depreciation, an increase in inflation, hike in interest rates, and all this eventually results in lower consumption and investment, thereby slowing the nation’s GDP.
The condition is even worse for companies that use crude oil or derivatives of crude as raw materials like tires, lubricants, paints, footwear, refining, airlines, logistics, etc. Hence you might have noticed that when global crude oil prices start rising, Indian stock markets, especially the companies heavily dependent on crude start falling and
10. Market Sentiments/Investor Confidence:
Last but not the least, market sentiments or investor confidence level is an important factor that affects the stock market to a great extent. This refers to the overall attitude of investors toward a particular security or the broader financial market. When market sentiment is positive or bullish, investors expect upward price movement in the stock market, and under such circumstances, they mostly prefer buying into dips and corrections.
Contrary to this, when market sentiment is negative or bearish, investors expect downward price movement in the stock market, and under such circumstances, they mostly prefer selling or booking profits on every rise or pullback.
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