There are many aspects to investment, the most common ones being mutual fund investment, public provident fund, gold and real estate. These are mostly low risk and low yield investments, which means that there is some assurance that your investment will be safe, but at the same time, the returns expected are on the lower side.
However, if you are ready to take risks with your investment, then there are other options that are termed as high risk and high yield investments. This simply means that at the expense of greater risk, you will get much higher returns.
The most common and popular way to achieve this is to invest in the stock market. Let us delve deeper into the world of stock market economics in order to understand it better.
What is the stock market?A stock market is a place or a platform where investors can buy and sell financial instruments like shares and bonds. A stock market exchange, like the Bombay Stock Exchange and the National Stock Exchange, BSE and NSE in short, respectively, are stock exchange mediators that allow buying and selling stock. But what is a stock or a share? In the most basic of terms, when someone opens a company, they alone or a group of people who funded the company are sole owners of the company.
Now, if they want to raise more money for the company, either to expand globally, or to branch out, then one of the options they have is to make their company public. Making the company public, in the simplest of terms, is to make the company available to the public in the form of shares. Once the company is public, people buy shares in the company and become part owners of the company.
Why is investing in the stock market considered risky?Like everything else in life, the higher the risk, the greater the reward. Unlike other investment options, the stock market can be a little bit risky but the payoff will be much higher. One of the major reasons for this risk is market volatility. The stock market is very volatile and extremely unpredictable.
This means that the shares you bought can come down or go up for reasons that can sometimes not be explained, though other times they can be.
Due to this unpredictability, the stock market is considered a risky prospect. However, if you study the market in great detail and invest enough time on market fluctuations, you can reap the rewards. The first step towards this is to understand the factors affecting stock prices. What can make stock prices go up, or down? Read on to find out.
Factors affecting stock market
Supply and demandThere are so many factors that affect the market. But if you strip all that is on the outside and look at the most basic factor, it is simple: supply and demand. Like all commodities, an imbalance between supply and demand will raise and lower the price of stock. If there is a sudden scarcity of potatoes, and more and more people are lining up to buy them, the price of potatoes will immediately skyrocket.
Similarly, if a company is doing well and everyone wants to buy shares of the same company, there will be a shortage of shares, leading to the shooting up of the stock price of the company. And the opposite happens if there are too many shares available, but no one wants to buy them. The stock price will plummet in that case.
Company related factorsIt is obvious that if a company has public shares, then anything that is happening within the company will directly affect the share price. So, if the company is on the rise, with successful product launches, increased revenue, reduced debt, and more influx of investor capital, then the stock price of the company is bound to increase, because everyone would want to buy shares of such a company that is going from strength to strength.
However, if the company is incurring losses, having product failures, amassing debt, then a majority of the shareholders would want to dump the shares of such a company, reducing the stock price. Other factors that can make stock prices go up and down include changes in the management of the company, and mergers and acquisitions.
Investor sentimentThe sentiments of the investors themselves can also influence stock market prices. How the stock market performs has something to do with the way investors are putting in money. If investors are taking greater risks and investing aggressively, then stock prices will go up. On the other hand, if investors are more subdued, choosing safety over risk, then the stock prices will come down. There are two factors in this aspect:
- Bullish market:
A bullish market is one where the investor is much more confident while taking risks and invests in a much more aggressive manner. When more people are investing confidently, the demand goes up, leading to increased stock prices.
- Bearish market:
A bearish market is one where the investor is more worried about risks and losing his or her investment and therefore, invests with lesser confidence with safety in mind. This causes the stagnation of the market and the stock price eventually comes down.
Interest ratesThe goings on at the Reserve Bank of India directly affect stock prices. The RBI decides the interest rates in India and they keep changing it at regular intervals to stabilise the Indian economy. Naturally, a higher interest rate will mean that companies will have to pay more for loans, resulting in lesser profits.
This will reduce stock prices. Inversely, lower interest rates mean that the company can now borrow money from banks for much lesser costs, thus saving their money and making a higher profit. In this case, the price of stock will go up.
PoliticsOne of the most important factors affecting stock market in India is the political climate of the country. If the political climate is dire, with the government appearing weak, risk of war, or if the public sentiment regarding the current government is not good, the price of stock will go down.
Similarly, if the government appears strong, with good public support, the stock price will be healthier. Also, if the government has good developmental policies, it will cause investors to invest with better enthusiasm, while government with a weak developmental agenda could lead to a decrease in stock prices.
Current eventsNews and other current events also affect the stock market. Current events that affect the stock market include any political turmoil, civil war or riots, or terrorist attacks. All these events are bound to make stock prices go down drastically and affect the market volatility.
Natural calamitiesCalamities like earthquakes and floods drastically reduce the stock market price. This happens due to many reasons, like destruction of property and other assets. This causes companies to incur heavy losses which leads to falling of stock prices. Company sales are affected due to a breakdown of manufacturing and transport of goods. Therefore, when natural disasters occur, stock prices are bound to fall.
Exchange ratesHow the Indian rupee stands in relation to the dollar or other foreign currency is also one of the factors affecting share prices in India. A strong rupee means that our economy is growing and this will lead to higher stock prices. However, there are different repercussions for different people in situations where the performance of our currency is concerned.
When the value of the rupee increases, prices of Indian commodities abroad go up, leading to lesser demand, and exporters suffer, making their stock prices go down. At the same time, importers can buy goods at lesser prices and their stock goes up. When the rupee weakens, exactly the opposite happens, that is the stock prices of exporters go up, while those of importers go down.
Thus, investing in the stock market is something that can give the most returns compared to other forms of investment. But it also carries with it significant risks. But, nobody can deny that if these risks are calculated, then the yield will definitely match up to the risks. The above factors are some that directly affect the stock market, and a keen eye in these factors will help you decide when to buy shares or sell them. Timing is key when it comes to stock market investment.
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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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