Stock markets can be volatile, and the reasons particular stocks rise and fall can be complex. More often than not, stock prices are affected by a number of factors and events, some of which influence stock prices directly and others that do so indirectly. According to stock market guru Peter Lynch, an important point to remember when investing is that â??there is a company behind every stock and a reason why companies--and their stocks--perform the way they do.â?
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Developments that can occur within companies will affect the price of its stock, including mergers and acquisitions, earnings reports, the suspension of dividends, the development or approval of a new innovative product, the hiring or firing of company executives and allegations of fraud or negligence. Stock price movements will be most drastic when these internal developments are unexpected.
World Events
Company stock prices and the stock market in general can be affected by world events such as war and civil unrest, natural disasters and terrorism. These influences can be direct and indirect, and they often occur in chain reactions. The social uncertainty and fear generated by the terrorist attacks on Sept. 11, 2001, affected markets directly as they caused many investors in the United States to trade less and to focus on stocks and bonds with less risk. An example of an indirect influence on markets is the announcement of a new military venture by a country in response to the outbreak of civil unrest or conflict abroad. This announcement likely would cause the price of the stocks of military equipment and weapons manufacturers to rise due to an expected increase in defense contracts, which in turn can raise the value of stocks for companies that supply military equipment parts and technology. It likely would raise the demand for, and price of, natural resources used to make these parts, which would raise the price of stocks representing particular mining and natural resource processing companies.
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Inflation and Interest Rates
One of the more predictable influences of the stock market are periodic adjustments of interest rates by the U.S. Federal Reserve to combat inflation. When interest rates are raised, many investors sell or trade their higher risk stocks for government-backed securities such as bonds to take advantage of the higher interest rates they yield and to ensure that their investments are protected.
Exchange Rates
Foreign currency rates have a direct impact on the price and value of stocks in foreign countries, and changes in exchange rates will increase or decrease the cost of doing business in a country, which will affect the price of stocks of companies doing business abroad. While long-term movements in exchange rates are affected by fundamental market forces of supply and demand and purchase price parity, short-term movements are driven by news, events and futures trading and are difficult to predict.
Hype
Stocks and the stock market also can be affected by hype about a company or the release of new products or services. Many people and organizations have an interest in promoting particular stocks and industries to increase the value of their own shares and profits, and positive financial reports and stock market newsletters, Internet blogs, press releases and news reports can build high expectations for the performance of companies, which will raise the price of their stocks. This can occur even when the hype has no foundation in truth; investors are wise to consider peopleâ??s reaction to hype rather than analyze the merits of the positive promotion.rnrnHype (and its opposite) can be advanced by respected stock market authorities such as Warren Buffet, Peter Lynch and hedge fund investor and financial speculator George Soros; such is the respect given to these individualsâ?? skill and past success that they sometimes can affect the movement of markets by simply suggesting that developments might occur.