A stock exchange is a location or platform where investors can buy and sell financial instruments such as stocks and bonds. In the most basic sense, when someone starts a business, they alone or a group of people who fund the business are the sole owners of the business.
Now, if they want to raise more money for the company, either to expand globally or to branch out, one of their options is to go public. Simply put, going public means making the company available to the public in the form of shares. People can buy shares and become company owners when a company goes public.
FACTORS AFFECTING STOCK MARKET
Supply and demand
Numerous factors influence the market. But when you strip away everything on the outside and look at the most fundamental factor, it is simple: supply and demand. An imbalance between supply and demand, like any other commodity, will cause the stock price to rise or fall.
Similarly, if a company is doing well and everyone wants to buy shares of the same company, there will be a scarcity of shares, causing the company’s stock price to skyrocket. However, if too many shares are available and no one wants to buy them, the opposite occurs. In that case, the stock price will plummet.
The actions of the Reserve Bank of India have a direct impact on stock prices. This is because the RBI sets interest rates in India, changing them regularly to keep the Indian economy stable. So naturally, a higher interest rate means businesses must pay more for loans, resulting in lower profits.
Stock prices will fall as a result of this. Lower interest rates, on the other hand, mean that the company can now borrow money from banks at much lower costs, saving money and increasing profits. In this case, the stock price will rise.
Company related factors
It goes without saying that if a company has publicly traded shares, anything that happens within it will directly impact the share price. So, suppose the company is on the rise, with successful product launches, increased revenue, reduced debt, and an increased influx of investor capital. In that case, the company’s stock price is bound to rise because everyone would want to buy shares of a company that is on the rise.
However, if the company is losing money, having product failures, or amassing debt, most shareholders will want to sell their shares, lowering the stock price.
Investor sentiment can also have an impact on stock market prices. The way investors invest money has an impact on how the stock market performs. Stock prices will rise if investors take more risks and invest more aggressively. On the other hand, stock prices will fall if investors become more cautious, preferring safety over risk. This aspect is comprised of two components:
- Bullish Market – A bullish market is one in which the investor is much more confident in taking risks and investing aggressively. Demand rises when more people invest with confidence, resulting in higher stock prices.
- Bearish Market – In a bearish market, the investor is more concerned about risks and losing his or her investment, thus investing with less confidence and safety in mind. This causes the market to stagnate, and the stock price eventually falls.
The country’s political climate is one of the most important factors influencing the Indian stock market. If the political climate is bleak, with the government appearing weak, the risk of war, or negative public sentiment toward the current government, the stock price will fall.
Similarly, the stock price will rise if the government appears strong and has widespread public support. Furthermore, if the government has good developmental policies, investors will be more eager to invest, whereas a government with a poor developmental agenda may cause stock prices to fall.
The value of the Indian rupee in relation to the dollar or other foreign currency is another factor influencing share prices in India. A strong rupee indicates that our economy is expanding, which will lead to higher stock prices. However, when it comes to the performance of our currency, different people face different consequences.
When the value of the rupee rises, the prices of Indian commodities in foreign markets rise, resulting in lower demand, and exporters suffer, causing their stock prices to fall. Simultaneously, importers can purchase goods at lower prices, increasing their stock. When the rupee falls in value, the stock prices of exporters rise while those of importers fall.
The stock market is also influenced by news and other current events. Current stock market events include political unrest, civil war, riots, and terrorist attacks. All of these events are bound to cause stock prices to plummet and affect market volatility.
Natural disasters such as earthquakes and floods significantly impact stock market prices. This occurs for a variety of reasons, including the destruction of property and other assets. This causes companies to incur significant losses, resulting in a drop in stock prices. In addition, a breakdown in manufacturing and transportation of goods is affecting company sales. As a result, stock prices are bound to fall when natural disasters occur.
Various economic indicators influence the overall economy, which affects the financial market. The stock market is heavily influenced by changes in oil prices and GDP. Any price change in a country that is reliant on imported oil is likely to have an impact on the economy. One of the key determinants of the stock market is the movement of oil prices.
Similarly, GDP considers the country’s total economic production as well as its overall economic health. It aids in highlighting economic developments and the market’s future direction. A strong GDP will have a positive impact on financial markets and investment.
Monetary Policy of RBI and Regulatory Policies of SEBI
The Reserve Bank of India (RBI) is the apex body in charge of India’s monetary policy. The RBI is constantly reviewing its monitoring policy. Any change in Repo and Reverse Repo rates impacts stock prices. When the RBI raises key interest rates, it reduces bank liquidity. This makes borrowing more expensive for them, so they raise lending rates.
Investors perceive it as a barrier to the expansion of business activities and begin selling shares of the company, lowering its stock price. However, the opposite occurs when the RBI follows a dovish monetary policy. Banks lower lending rates, resulting in credit expansion. Investors see it as a positive step, and the stock price begins to rise.
Gold Prices and Bonds
There needs to be a well-established theory expressing the relationship between stock prices and gold and bonds. Stocks are typically regarded as risky investments, whereas gold and bonds are regarded as safe investment havens. As a result, during a major economic crisis, investors prefer to invest in safe instruments. As a result, gold and bond prices rise while stock prices fall.
Government policies have a significant impact on the economy and business. In order to improve the country’s economic situation, the government must implement new policies. Therefore, any new policy change has the potential to be beneficial to the economy or to tighten the economy’s grip. This raises the prospect of the stock market being impacted by any changes or implementation of new policies by the government. For example, an increase in corporate taxes significantly impacts the industry because profits suffer while stock prices fall.