Explained: The Factors that Affect Stock Prices
The stock market can be an attractive investment opportunity. It enables you to purchase a share of some of the world’s most influential companies. For example, you could start trading in Spotify (SPOT) stock, meaning you’d own a tiny percentage of the streaming service.
The stock market experiences high levels of volatility, and it’s periods of turbulence that present traders with attractive opportunities to profit. Additionally, when stock prices change dramatically, you’re at risk of making potential losses on your investment.
You can learn about the factors that can affect stock prices, to help you to plan ahead for these events and avoid this from happening, but also to know how to best approach the stock market when they occur.
In this article, we will help you to understand the different factors that can affect the value of stocks, so that you’ll be better prepared to open a position of your own in the stock market.
Supply and demand
Supply and demand have a direct and significant impact upon the value of a particular stock. It’s relatively obvious, but the more demand there is for a product or service, the more the company is likely to charge for their goods and better their performance. In turn, this is likely to cause the value of the stock to increase.
In order for a stock to be able to perform optimally in the market, supply and demand need to be in balance. When the two are out of balance, demand outweighing supply, or vice versa, the stock’s value could shift dramatically.
Global events
Events that take place throughout the world that have an impact upon national economies, can also affect the stock market. Take the coronavirus pandemic, for example — this event has detrimentally weakened economies and has caused some companies to fare better than others, depending on the sector that they fall into and their ability to operate and trade online.
If we consider Amazon (AMZN) in this case, the ecommerce giant has benefitted greatly from the coronavirus pandemic. Physical retail stores were shut unless they sold essential items, causing people to turn to online platforms to make purchases.
Some other examples of events that can impact the stock market are:
• Elections
• War
• Natural disasters
• Terrorism
Market sentiment
It’s only natural that where humans are involved, psychological factors are likely to creep in and the stock market is no exception.
Market sentiment is one of the biggest influencers when it comes to stock prices — it’s effectively a collective belief that the landscape of the market will change, which causes traders to act different, thus, influencing the change that they pre-empted.
Market sentiment can cause prices to rise or fall dramatically in a small period of time, since traders are likely to follow a market trend when it begins.
Macroeconomic factors
Inflation, interest rates, economic growth and unemployment can all affect the stock market significantly, since they all can denote the economic health of a nation. When the world’s economies are stronger, consumers tend to have surplus capital that they can use to make purchases of goods or services. This means that companies will receive greater custom and subsequently, boast a higher stock value.
Releases of economic data are periodic, like the Non-Farms Payroll for example, which is a report on the United States’ unemployment rates. Periodic events like this one are typically plotted in an economic calendar, which includes a multitude of events that could affect your investment in the stock market.
By trading on an online platform like Skilling or CMC Markets Trading platform, for example, and also using an economic calendar, you will be able to plan ahead for events that could affect the stock market and speculate on the value of your trades, to decide how best you can react to fluctuations in value.
The stock market is filled with opportunities to make gains on your investment. However, your capital is at risk when placed in any financial market, so thorough research is required prior to opening a position.
By planning thoroughly; having a better understanding of the factors that can affect stock market prices; using technical and fundamental analysis, and studying the market online, you’ll be on your way to making successful trades in stock.
