It is very common to hear people saying that you cannot predict the stock market and it is very true that market may fall or rise at any given point of time. This becomes the prime reason for some people treating the stock market as a place to gamble because no one knows you what will happen the very next moment.
What actually changes the stock price?
If the market is so uncertain then how people like Warren Buffet and Tanmay Jhunjhunwala are making crores and crores of money by trading stocks?
In my initial days of trading, I always used to search ways to master this skill of anticipating the price fluctuations.
As a beginner, it’s hard and a time killing job to explore and understand the driving forces of the stock market. If you enhance this skill of reading the market then no one can stop you to become a master in stock trading.
Don’t worry anymore …
Here I will share with you the factors that govern the market.
If you can understand and predict consequences of these 11 factors you will be the master of your trade.
1) Supply and demand: The stock market completely work on the concept of supply and demand. Other factors basically affect the supply and demand value which further causes the change of stock prices. This forms the base for fluctuation of stock price.
So how does it happen?
This is very simple if a number of investors who want to sell a particular stock are more (increase in supply) but comparatively, there are fewer people to buy the stock( decrease in demand) then the stock price goes down and vice versa.
This variation in supply and demand is caused by the wide range of factors that is discussed here.
2) Market sentiments: This is what that drives the supply-demand chain. Market sentiments refer to the opinion of investors/traders in the market. This is what that creates a difference in supply and demand. For a particular instance, different people may have different opinions about a security, this makes some people buy and some people to sell a stock causing a difference in supply and demand. This is why the stock market is called unpredictable because you cannot predict how different traders will react to different circumstances, and these differences cause some stocks to rise and some to fall.
These are the two major basic things that drive the market, rather I would say that other factors contribute to bringing change in Market sentiments which subsequently affect supply and demand chain resulting in price variations
3) Government policies: If a new government comes into power, it may decide to make new policies. Sometimes these changes can be seen as good for a business, and sometimes bad, again here market sentiment drives the fluctuation. Monetary policies have a significant effect on the market. Policies may lead to changes in inflation and interest rates, which in turn may affect stock prices.
4) Foreign market: When foreign countries go through an economic slump, it impacts the ability of companies to sell goods overseas. This leads to a drop in revenue which is reflected as a drop in the stock market.Fluctuations in foreign stock exchanges also have an effect on the local stock market – when foreign exchanges go through a price drop or begin to fail, traders and investors anticipating a ripple effect get bearish, resulting in a drop in the market
5) Institutional investor: Institutional investors have a profound impact on stock prices because they account for most of the trading, their buying can shoot a stock price up and their selling can lower down a stock price. Communication from Institutional investors can also affect stock prices, although this may have a short term impact.
6) Fundamental factors: A Company stock may rise if its fundamental factors are strong and perform sound business practices. Their fundamental values remain sound and consistent without getting affected by crisis or other circumstantial factors. These may include their growth in income, dividend, debt status, in short, their balance sheet is balanced.
7) Economic growth: Higher economic growth or an expectation for growth may facilitate corporations to be more profitable because there will be more demand for goods and services. This will help boost company dividends and therefore share prices.More money going out from a country makes the economy weaker.
A country which predominantly exports goods has a stronger economic condition. If the economic condition of the country is not stable or there is no improvement, like increased unemployment, inflation, deflation etc then the market value of an individual stock will not have any influence in changing the overall market.
For example, if the whole country is experiencing an economic boom, the market price of an individual stock might rise in tandem with other stocks.
8) Sector growth: Often, the stock price of the companies in the same industry will move in tandem with each other. This is because market conditions generally affect the companies in the same industry the same way. However typically, the stock price of an organization can have the benefit of a chunk of unhealthy news for its competitor if the businesses area is competing for an equivalent market.
9) National/International News: When anything happens on the international stage, good or bad, it usually affects the markets. Changes in leadership, whether through elections, violent take-overs or monarchical deaths, can all negatively or positively affect the markets. War, terrorism, natural disaster all these things can affect the market.Exchange rates, trade agreements and shifting international relations can boost the economy and promote spending or, inversely, can cause a market panic.
10)Political issues: If there is a political instability in a country, riots or rivalry between parties can affect the market adversely. These things usually cause bearish sentiments resulting in fall of the market.
11) Company news: Company-specific factors drives the emotion of market depending on how good or bad it is for investors. These may include
- News releases on earnings and profits, and future estimated earnings
- The announcement of dividends
- The introduction of a new product or a product recall
- securing a new large contract
- anticipated takeover or venture
- a change of management team
- accounting errors or scandals
Example: Consider a situation where two companies declare their venture which all traders came to know through news ( Company news). This may cause some to think that venture is not a good decision and overall profit may drop ( Market sentiment), this may cause drop in stock price as people will pull out their money from the company stock( increase in supply decrease in demand) thinking it may suffer loss and business may not show a growth ( Fundamental factors) but then some govt policies are declared that support the business of venture,( Government policies) which again drives the sentiments in positive direction and traders start buying stocks ( Increase in demand decrease in supply) resulting in increase in stock price.
Look how subsequently different factors drive the market resulting in price fluctuation.
So, a lot many things yet very little to start with. I hope you have got an overview how vast and interlinked when it comes to studying the stock market.
All you need is to keep yourself updated what is currently happening in the market and which factors are going to affect your stock, all you need is to relate and find the significance of each factor that will govern the price of your securities.
Worried ….? Things seem to be complicated? Are you thinking it’s not your cup of tea?
I will simplify it for you. All that you need to do is identify what type of investor/trader you are. You need to look only to those factors that concern your goal of investment.
For example, a Long term investor will not bother the day to day fluctuations rather think of a bigger picture for a long duration of time.
I know, these things even caused me to change the way of trading and if you perceive this you are going to upgrade yourself from beginner immature trader to regular professional investor.
Let me help you find yourself. Subscribe to get yourself updated.