4 Major Factors Affecting the Stock Market
Stocks are representative of ownership equity in an organization. Stocks give shareholders, the people who own them, a residual claim on the organization’s earnings in the form of capital gains and dividends. The stock market is composed of individual and institutional investors to buy and sell shares of public organizations. Investing in the stock market carries risk because there is no guarantee of profiting off of the investments. There are four major factors affecting the stock market. These factors can drive stock prices up and down and ultimately impact one’s investments.
Macroeconomics
One of the main factors affecting the stock market is gross domestic product (GDP). Since GDP is an indicator of growth and contraction, and overall estimates the health of the economy, it can reflect stock prices. If an economy is healthy and growing, organizations are likely to be feeling the same effects. Another factor in macroeconomics is unemployment. If unemployment is high it shows a weak market and if unemployment is low, it shows a strong market.
Politics
Political effects on the stock market are often indirectly caused. Domestic or international turmoil can cause the stock market to go down. The stock market sees uncertainty as risk and therefore political uncertainty has a negative impact on stocks. For example, if a partner in the supply chain is affected by political turmoil, that can drive down the stocks of the affected companies. Corrupt and hostile governments create riskier environments for investors and therefore can drive prices down. However, credible and stable governments can drive stock prices up.
Consumers
Ultimately, all the ups and downs in the market are caused by humans. Consumers decide what products they want to buy and adversely drive that organization’s stock prices up. They also decide what products they don’t want to buy and drive those stock prices down.
The Pandemic
Since the start of the COVID-19 pandemic, user preferences have changed. Organizations that withstood the pandemic have proven to have lasting products or services. For example, the stock prices of video conferencing tools shot up during the pandemic. All meetings and events had to be moved to a digital format and digital conferencing was the answer. It gave people the ability to work together from anywhere. The social climate was able to have an effect on the stock market. During this same time that video conferencing tools stocks went up, stocks were going down for other organizations. As an example, airline companies saw their stocks plummet because of travel restrictions and fear of spreading the coronavirus.
The stock market is one of the riskiest investments a person can make. A lot of things come into play and there are many factors affecting the stock market. Some of those are macroeconomic factors and political factors. Or even factors such as consumers preferences and changes in consumer behavior caused by events such as the COVID-19 pandemic. Most of these factors are stable and will always be present. But one such as the pandemic, could be another type of event such as a natural disaster or a human caused event. However, knowing these factors and being aware of the social dynamic could lead you to making a rewarding investment.
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