Investor Education | What makes the stock market move?
What has history taught us? The stock market has soared at certain times and plummeted at others, resulting in significant short term swings for investors. It has also moved in bull market cycles where prices have run up, and bear markets when prices have fallen. And, at still other times, it has stabilized.
Instead of putting all your efforts into trying to "time" the market to your advantage, you may be better served by understanding the basics of why stock market prices rise and fall. Here are some key factors in the equation.
- Supply and demand: If the supply of shares is more than the demand, the price may decrease. Conversely, the price may increase when supply is short and demand is great. The demand for a particular stock often relates to its yield.
- Interest rates: When the bank interest rate, as determined by the Federal Reserve, is lowered, investors may borrow more money, often resulting in higher stock prices. On the flip side, if the interest rate increases, fewer investors are encouraged to invest, potentially causing stock market prices to fall.
- Financial position: Not surprisingly, a company's financial position will likely have an impact on the price of its shares. If the financial position is good and expectations for dividends are promising, the price may rise. When the price reaches a high level and investors start selling off shares, he price may come down.
- Political environment: Political events may affect stock prices, especially in the short term. This applies both domestically and on an international basis. For example, should a war suddenly break out, history has shown that stock prices can be expected to fall. However, if an explosive political situation is resolved expeditiously, it could result in a price rebound.
- Economic conditions: This operates much in the same way as the political environment. A booming economy pointing upward will be reflected in higher prices. But an economic tailspin may have the opposite effect on the market.
- Speculation: Widespread speculation can move the market one way or another. If a majority of investors believes stock prices will rise and invest accordingly, they probably will rise. Similarly, if there is prevalent doom and gloom among investors, prices may decline.
- Institutional investors: Similar to individuals, large institutions buy and sell stocks, but they do so in greater quantities than typical investors. Because of this bulk trading, prices may move up or down, depending on the activity.
Is that all there is to it? Not by a long shot. Numerous other factors may come into play. The list is far too extensive to cover here, but it ranges from commodity prices to social influences to scandals involving corporate officers—even the weather can be a contributing factor.
There is no absolutely foolproof method for success. Keep this information at your disposal to make sound decisions with the assistance of your professional adviser.
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