What Economic Factors Affect Stock Prices?
The stock market is perhaps the most dynamic component of the world market, especially the Foreign Exchange or Forex stock trading market. Although the market can be vibrant and active , especially with the potential profit, stock prices are very volatile. It is therefore essential to familiarize yourself with the economic factors that impact the trends in the stock market if you want to participate in it.
Supply and Demand
The most basic principle of economics correspondingly reflects the market equity. Price is directly affected by stock market trends in trading. When more consumers purchase a particular type of stock, its price will automatically increase. And when more traders sell that stock, its price will then plunge. It is not easy to determine stock market trends but your broker can provide you with some idea of the current market trend to guide you.
Inflation and Interest Rates
All stock markets are affected by inflation and interest rates. Since the country's central bank mandates its monetary supply and policy, this becomes the primary focus of the stock market participants, particularly the investors. Even the perception of the investors and traders on what is likely to happen with interest rates and inflation will also impact the stock market prices is various ways. People's interest in investing in a particular economy (and thus in the companies within that economy) is based in part on beliefs about whether the country's currency prices will increase or decrease.
The interest rate is the measure of pricing levels, whether they increase or decrease for a certain time period. Because of the growing number of commodities that are available in a country's market, the way these products and services are grouped will be used to calculate the changes in its pricing. An increase in its pricing will indicate an inflation rate that will go up, which correspondingly can weaken the currency.
Trade Flows, Political and Macroeconomic Events and Activities
A country's stock market can be influenced by the monetary flows that are brought about by the trading between countries. For instance, when the country's imports exceed its exports, it is likely that the currency will devalue. More investments in the country on the other hand will strengthen the currency.
Events such as political instability or crisis can influence negative effects in the economy. However if such events occur in a country which successfully survives the political crisis, it can actually help improve the economy as it allows other countries to regain confidence.
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