Have you ever wondered what make the stock market rise and fall? If you watch the news at all, you will have seen the stock market levels mentioned. You have probably also noticed that the prices rise and fall each day. Why stock market prices rise and fall is a complex question with a complex answer.
There are many factors that affect the price of stocks. Included are inflation, interest rates, domestic political unrest, war or terrorism, crime, fraud and oil or energy prices to name but a few.
All of these factors will drive the price of the stock market up or down. However regardless of these factors, the price of stocks is liquid and it is determined by how much buyers are prepared to spend and how much sellers will take for their stock.
Usually, to tame the rate of inflation, the federal government hikes interest rates. While this slows the inflation rate, it also raises the interest in small lending institution stocks (these are guaranteed by the government, thus VERY attractive here). This in turn moves investors away from equity stocks in lieu of the guarantee available with the small lenders. Risk here is lower, obviously.
This affects stock prices in several areas of the market. What happens is this: say a stock was selling at $20 per share before the interest rate went up from 5% to 6%. So the stock price is figured like this: 1/. 05= $20. After the hike, the price is now down to $16.67 per share or 1/. 06. This represents an almost 17% drop. Taken right across the market, this can adversely affect many other stocks as well and drive the market down temporarily.
A spike in oil prices can and will affect auto prices, food prices, gas prices and many others, thus effectively pushing inflation upwards. This presses the government to raise interest rates and we have the example above all over again.
War abroad can affect the market, too. A recent example is the war in Iraq, which has driven oil prices up to unprecedented levels. We have all seen the exorbitant gasoline prices that have been the result, but now we are seeing hikes in home lending, grocery prices and transportation costs also.
So as you can see, there are many scenarios that can unfold and affect how the stock market prices rise and fall. All these factors play out together in the rise and fall of the stock market. If you watch it closely, you can pick out the trends and accurately predict price hikes, interest rate increases or when inflation will occur again.
Another factor in how the stock market rises and falls is foreign currency rates. As a particular currency fluctuates, stock prices in companies based in that country will react accordingly. When the Japanese yen falls, so does interest in Japanese technology stocks. Conversely, if the US dollar falls to dangerous levels, our government simply prints some more paper money and places it in circulation. This, in my personal opinion, creates a false sense of security in the economy.
However you look at it, stock prices affect how we live every day. All aspects of our daily lives are affected. Grocery prices, gas prices and the cost of buying anything are driven up. So watch the stock market closely. It affects you whether you know it or not.
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