The financial market is complex with the presence of huge number of investors and a variety of investments. With the availability of historical data and the basic economic principles, some indicators help to analyze the market movements. The experience and available data make market experts identify stock market movements more significantly. Here are some parameters and indicators that are base to analyze the ups and downs in the stock market.
Interest Rates
Market analysts believed that interest rates impact the stock markets primarily. When the interest rates are high, investors would prefer fixed income investments as they are getting a good amount of returns without taking a risk. Whereas when interest rates decrease, investors move towards stocks over fixed interest-bearing investments in the low-interest-rate environment because inflation is factored into the equation. In a nutshell, an increasing interest rate impacts the stock market negatively and it comes down.
The State of the Economy
It is a bigger-picture summary than other parameters to drive the stock market. When an economy is in good condition with a healthy growth rate in GDP, investors are more likely to invest as there is no drip in income. On the contrary, a recession or slowdown in an economy’s results generally reverses all positive dynamics and the net effect will be a downtrend in the market.
International Capital Flows
A downfall in a major economy will be a favourable occurrence for another economy. If a foreign country deteriorates, the capital moves to other countries. Here one should understand the impact of the US dollar downfall internationally. US dollar is an internationally traded currency. A drop in the US dollar is impacting a large number of emerging markets positively. If the US dollar is underperforming then most of the other economies in the world would receive capital that has left the US stock market.
Growth of major segments
A decline in the major industries of an economy may pull down the entire market and major market indices will be affected at worst. Stock markets are majorly impacted by the major segments because they create new investment opportunities in an economy. When major industries are in trouble, it weakens the economy that causes falling stock prices.
For example, in 1990s, the rapid growth in IT sector boomed the dot-com boom that set the stock market graph higher. Ad In 2007, two major sectors, banks and mortgage lenders, were in financial trouble at worst. Stocks of companies engaged in three sectors are decreasing rapidly.
Demand and Supply
The most basic indicator is demand and supply. In stock market, demand is the number of securities that investors want to purchase and supply is the number of securities that providers want to sell. The price movement of the securities can be identified by a temporary difference between supply and demand.
When the demand is higher than supply, the buyers bid higher for the stocks to convince the sellers to sell them. And, when the supply is high, sellers decrease the stock price to convince buyers to purchase.
However, it is also considerable, the performance of the issuing company (private or government) also affects the stock price movements. Various factors affect demand and supply such as:
- Inflation or deflation
- Fiscal and monetary policy
- Technological Advancements
- Natural disasters or other natural fluctuations
- Corporate or government performance etc.
In a nutshell, a general direction in which the stocks are moving called market trends that can move upwards or downwards. This movement for a specific timeframe is considered a trend. An investor should understand the market trends before making an investment in the stock market. The longer the trend, the more easily it can be identified. An investor asking how to do share trading should include this practice in his/her daily life.
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