If you have been wondering about the key reasons behind stock market fluctuations, you should know that there are innumerable factors behind the scenes that influence the same. Beginners to the stock market often hold back from getting into trading owing to the constant fluctuations witnessed in the market. However, once you understand the key reasons behind such fluctuations/changes, you will gain more confidence in trading.
One of the key reasons for fluctuations in Indian stock market is the eternal equation between demand and supply like it is anywhere else in the world. The prices in the market are naturally impacted on a regular basis by the overall relationship between supply and demand for every stock. Whenever demand crosses supply levels for any particular stock, the prices will go higher. At the same time, whenever supply levels cross demand for a stock, the share prices will come down as well. This is a basic thumb rule towards understanding changes in share market prices.
Key factors worth noting
There are various other factors affecting share prices in the stock market. Some of these include the following:
1) Earnings of Companies- Most people invest for the long haul in those companies which they feel have good net worth and are likely to garner better gains over the years. Companies making better profits and performing well will naturally draw more investors, leading to increases in share prices.
Companies that are listed on the stock exchange will have to declare their earnings on a quarterly basis and also on an annual basis. Companies with good performance and earnings (per share) will have more demand. You should thus look for the earnings report and see whether the company is doing well. Earning less than the projection will however cause share prices to fall.
2) Positive/Negative Developments- Some of the commonest causes of fluctuation of prices in stock markets relate to either good or bad news for any particular company. Some of the positive developments could include a hike in interest or a new acquisition or even venturing into a new sector/market. This may lead to an increase in share prices. Yet, negative developments such as downsizing, closing down divisions/offices/branches and so on may lead to lower share prices since people may panic-sell these stocks. Changes in policies of the Government and other financial developments like the budget may also play a part in industries/sectors impacted by the same.
3) Over and Under Valuation- Sometimes, share price fluctuation is due to undervaluation, i.e. fears that shares may eventually turn worthless if companies report negative developments. Expert professionals will attempt to buy these shares at lower prices during such mass-dumping of the same at lower prices. They will have made calculated assumptions about the organization doing well in the future and increases in demand subsequently, leading to future increases in the share value. Overvaluation similarly means assuming that a company will do excellently in the future and a rise in share prices, leading to people buying more at higher values.
4) Economic Reasons- Your trading account activity will naturally be impacted by various economic factors including geopolitical issues such as natural calamities, disasters, global issues, unrest, war, extreme weather, political fluctuations, and so on. There are microeconomic aspects, namely spending power of consumers, market trends, distribution, manpower, competitiveness, investments, etc.
Some other influences on the stock/share market
1) Some other factors impacting share price changes in the market include inflation, interest rates, and even the GDP.
2) Inflation is what indicates the changes in prices of the commonest services and goods used and consumed in the economy and works out the average living cost for an individual.
3) This is a vital factor along with the CPI or consumer price index which measures this rate of retail inflation. Markets are considerably affected by this major factor.
4) The CPI helps you understand the average spending power of individual consumers.
5) Inflation equates to a regime where prices are steadily rising or economies where prices of services/goods are rising continually.
6) Any sudden inflationary trend may negatively impact stock markets since the spending power of investors comes down as a result.
7) The Monetary Policy Committee (MPC) ordained rates of interest are also deemed important when it comes to stock/share price changes in India. The Monetary Policy Committee works out the lending and borrowing rates in India. If the latter goes up, then companies will naturally have higher expenditure relate to debt and lesser funds for pursuing expansion/growth likewise.
8) This may lead to a major impact on cash flows in the future for the company, leading to a reduction in share prices as well. A gradual rise in rates of interest may be somewhat healthier but a sharp increase may affect businesses negatively. This may impact specific business sectors as well. However, a hike in rates of interest may prove advantageous for financial entities and institutions, leading to an increase in their stock prices as well.
9) The Gross Domestic Product or GDP indicates the total services/goods produced by any particular economy. This is an indicator of the overall economic health of a country. A stronger GDP and positive growth mean that companies in the country have witnessed superior earnings and usually indicate a more positive outlook for the economy as a whole. This boosts the confidence of investors and leads to surges in the stock market.
10) The GDP, however, indicates the performance of the country's economy in the recent past, and hence, it does not impact the stock market as strongly as interest rates and inflation.