The forces at play behind the stock market are able to influence billions of dollars worth of stocks and shares in mere seconds. There are a set of 4 core factors that influence the market. They are supply and demand, government policy, speculation & expectation, as well as overseas transactions.
The influence of these factors can be categorized as either a trend or fluctuation. The term “trend” is used to refer to patterns and activity lasting for a longer duration, while “fluctuation” describes more fleeting, short-term influences. These trends and fluctuations are what generate profits and losses for those trading and investing in the market. Market traders or investors study these trends and fluctuations closely over long periods of time. They are then able to make predictions on how the market will look in the future.
Government Policy
The government plays a significant role in influencing the market. Policies implemented by the government and central banks have a strong impact on the workings of the financial market. An example of this is their use of interest rates to influence the rate of growth in the economy. Governments are able to increase or decrease their spending in an attempt to ease unemployment or stabilize prices. By adjusting the rates of interest and how much currency there is in the market, the state and administration have the power to alter the levels of investment that enter and leave the country.
a higher interest rate = faster growth
a lower interest rate = slower growth
International Transactions
The financial flows between different countries have an effect on a country’s currency and/or economy. The higher the outgoing amount of money, the more detrimental an effect it has on the country’s currency and/or economy. Countries with significant exports of goods and services have a continuous flow of money coming in. This money is consequently fed back into the economy, giving their financial markets a significant boost.
Speculation & Expectation
Speculation is a core component of our financial system. Whether you are simply a consumer, investing in the market, or even involved in policymaking, everyone has an opinion about what will happen to our economy in the near or distant future. Often, people’s beliefs will affect how they behave in the here and now. The use of sentiment indicators gives us insight into how people feel about the economy at a given time. These indicators can then be analyzed along with other more technical statistics. The outcomes give us an idea of future market conditions and help us manage our expectations.
Supply & Demand
Supply and demand are terms used to describe the complex push-pull dynamics of the market. It means that prices fluctuate in accordance with changes in supply or demand. If supply levels drop of something that is in high demand, prices will inevitably start to rise. Prices will start to fall again once supply increases. If supply remains stable, prices will still continue to fluctuate as demand rises and falls, although the changes will be more subtle.
The market revolves around these interlinking dynamics. Although these are four separate concepts that influence the market individually, they are also strongly connected. It’s through this connection that fluctuations develop. Government policies have an effect on international transactions. These international transactions lead to changes in speculation and expectation. Supply and demand can have knock-on effects for all of these concepts. These interlinked areas bridge the gaps between the conditions expected in the future, current decisions and current trends.
Understanding these four core concepts and how they interlink is the first stage of understanding the financial market and trends. The close study of these financial concepts, their fluctuations and the resulting market trends are a set of highly valuable tools used for providing insight. Skilled traders and investors use these insights to generate profits in a highly lucrative industry. Now you’ve grasped these four key concepts, you’re ready to observe the ebb and flow of the markets and witness these changing dynamics firsthand.
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