Factors Affecting Stock Market
First-time investors in the stock markets should consider familiarizing themselves with the sector to avoid falling victims of the related risks. They have to research in the field extensively and maximize the opportunities to heighten their profits. The stock markets are often competitive, and thus one needs to apply different and more distinguished techniques to survive (Demirer, 2013, pg.82). There are some broad economic factors that are known to impact the stock markets. These factors can either be intrinsic or extrinsic. This paper will majorly deal with the extrinsic factors. They include inflation/deflation expectations, monetary and fiscal policy, demographic trends, economic growth rates, interest rates, supply and demand and taxes (Sardasht, 2014, pg.130). These factors act as the fuel which steers the development of stock markets. The stated factors may either impact the stock markets positively (increased profits), negatively (decreased profits) or even in both extremes. Inflation/Deflation Expectations
Inflation refers to the rise in the price of commodities in relation to the currency. It lowers the buying power of a unit currency. This implies that the consumers will be compelled into buying lesser goods thus declining the expected profits. This has a negative effect on the economy and calls for a quick action to attain a steady state (Pimentel, 2014, pg.75). High inflation at times stimulates job growth. However, it can as well hinder the companies from hiring more personnel due to the low profits realized. This negatively affects the living standard majorly of the people with fixed income.
Analyzing the past trends of inflation can provide relevant insights to the first-time investors in the stock markets. However, this may not provide sufficient grounds for decision-making since such studies may give contradicting findings (Marcet, 2017,pg.33). Inflations can either have negative or positive implications on the stock markets. This greatly relies on the central bank’s ability to control the monetary policy. The investors are left with the responsibility to gauge the impact of both expected and unexpected inflations on stock returns.
Deflation refers to a state of reduced currency which consequently transpires to a higher buying power. In incidents of deflation, the value of a unit currency is considerably higher, and thus a unit currency may purchase a higher amount of goods. Precisely, deflation is the inversed form of inflation. It causes economic stagnation as well as high rates of unemployment (Li, 2010, pg.249). Deflation is caused by the fall in demand of items possibly due to increased supply or a decreased supply of the currency. Though a rare phenomenon, deflation has been historically proven to help consumers in terms of affordability of goods. Contrary, past research show that it has unfavorable effects on stock markets.
In the minimal cases of deflation which have occurred, stock market values deteriorated (Pimentel, 2014, pg.80). Ideally, consumers fear to invest in depreciating commodities as things are expected to be cheaper in future (Toraman, 2016, pg.6). This delays the purchases in the stock markets as consumers anticipate low return rates. The need for lending by investors and companies is usually lowered in a deflationary economy. Deflation results in a decline in the stock markets, an incline of government bonds and a sloping of the cooperate bonds.
The monetary policy entails the strategies put in place by the country’s central bank in relation to the money circulating in the economy and its worth (Kurov, 2016, p.1212). This is done to control inflation and interest rates as they have a direct impact on economic growth. First-time investors should have some basic knowledge on this policy as it can have a significant influence on the portfolios and net worth. The policy can be described as restrictive, accommodative or neutral (Kurov, 2016, p.1216). In the incidences of a fast growing economy, the central bank may take steps to bring back the economy to normalcy by restrictive measures (tight monetary policy). Contrary, when inflation is significantly lower, the central bank is charged with the responsibility to acquire the accommodative policy to facilitate economic growth.
The effects of the monetary policy to investments can be described as either direct or indirect. The direct impact is evident in cases of the level and the direction of interest rates (Stoica, 2012, p.10). The indirect impact, on the other hand, is realized through predictions about where the inflation is headed to.
Demographic changes in any typical country have major implications for investment risks and returns. The first time investors interested in investing in the stock markets should carry out adequate analysis on the financial markets to provide them with the insights of the possible profits and risks. Some trends in the population change are known to have negative consequential outcomes in the financial markets (Yau, 2012, p.158). A blend of the always declining birth rates and the ever-increasing number of pensioners poses a great threat to wealth creation. This rate threatens the certainty of the first-time investors in the stock markets. To maximize on the prevailing circumstances, it is highly necessary to consider the rapidly aging population in the construction of a portfolio.
Recent statistics imply that there might be unfavorable economic fluctuations due to the high rate of aging and the low birth rates. By 2030, the number of people aged 65 and above may increase by approximately 8.6% compared to their number in 2003 (Yau, 2012, p.156). The declining number of the younger population will consequently translate into a low buying power. Ideally, the younger generations have a tendency to spend more than they save. This will lower the demand for all kinds of investments.Apart from the challenges brought about by the aging population, it is also notable that the investment and consumer behavior may also be affected by the questionable rates of immigration. Though most of the western countries have substantial immigration flows, countries with lower immigration rates may have much to fear. First-time investors in the financial market need to have in mind the possible challenges posed by immigration (Marcet, 2017, p.35). It would be wise to invest in more stabilized countries to avoid risks. However much does the demographic trends create risks, it should also be noted that they are as well associated with opportunities. Investors may opt to maximize on emerging market economies.
Economic Growth Rates
The economic conditions of any state are reflected in the stock markets. A rapid growth of the economy often translates to increased return rates and profits in the stock markets (Narayan, 2013, p.599). These profits draw more recognition by the public as they can earn greater dividends by being shareholders in such companies. The economy of a country is directly proportional to the rate of profits in the stock markets.
If the economic activities of a country are reduced then, the stock markets will fall. The recession of the economic activities translates to decreased profits, fewer dividends and the firms become insolvent which may not be encouraging to the shareholders. However, the stock markets can as well rise in a recession. This can be caused by factors such as anticipation effects, ultra-low interest rates, and profits as a share of Gross Development Product (GDP) (Narayan, 2013, p.597).