Sample Essay on Economic Factors that Affect the Stock Market

Economic Factors that Affect the Stock Market

There are many economic factors that affect the stock market. Every investor has to be aware of these factors before making a decision to invest in the stock market. These are the main factors that make a stock market volatile. They also cause the price of some stocks to fall or rise. Some of these factors affect the prices of stocks indirectly while others affect them directly.

Deflation and inflation are some of these factors. Inflation can affect the stock market adversely. Inflation refers to the rate of increase of the prices of services and goods in a country. Inflation is caused by various factors including the manufacturing, transportation cost and sale of goods. The stock market responds by a selling surge when inflation rate is low. When inflation rate is high, investors think that companies might hold their spending back. This results in a revenue decrease across board and higher prices of goods and a decrease in revenue causing a drop in the stock market.

Deflation refers to a situation where there is a decrease in the price of goods. Although this decrease sounds like it can be good for investors, it causes a reduction in the stock market activities because to investors, deflation is caused by weakening of an economy.

Interest rates also affect the stock market. Decreasing interest rates causes an increase in activities of the stock market. This is because low interest rates are considered as harbinger to economic growth. Companies are able to borrow more and this impacts on their activities positively.

On the other hand, high interest makes borrowing money more expensive. Companies can cut down their spending or even lay off some workers. High interest rates also imply that a company cannot borrow the amount of money that it used to borrow. This affects the earnings of a company negatively causing a drop in stock market activities.

Foreign markets also affect the stock market. When foreign countries have poor performing economies, companies in a country may not be able to sell more goods overseas. This causes a decrease in their revenue. This decrease can also be reflected in stock market. If there are sharp drops or failures in foreign exchanges investors can anticipate ripple effects which eventually cause a decrease in the stock exchange activities in a country.

Economic outlook of a country also affect the stock market. If there are possibilities of a country expanding its economy, stock prices are likely to rise. This is because investors tend to purchase more stocks expecting to reap profits as the stock prices increase.

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