The Stock Market Has Major Mood Swings. What’s Driving Them?

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If there’s any one thing in finance that’s certain, it’s that stock markets are constantly fluctuating (except over the weekends when markets are shut)! When people’s moods change – from being confident or greedy, nervous or optimistic – it affects how they buy/sell stocks. This drives stock prices bat sh*t crazy!

Here’s what affects the market:

POLITICAL DRAMA

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Politics – especially elections and changes in Government – affect stock markets. For example, in the run-up to the 2014 Lok Sabha elections in India, people had high hopes from business and industry under Modi’s pro-development Government. 

The markets soared in the pre-election period and went on even after the elections.

Before the elections take place there is a lot of volatility in the market. Conversely, different circumstances like political instability, war-like situations and civil riots can cause steep downward trends in the markets.

Business:

Business 1Any change in business structure or dealings can create ups and downs in the market. Positive factors like increase in revenues, increase in cash flows, mergers etc. can cause an upward movement. Negative factors like change in management, fall in revenues, illegal activities etc. can cause a downward movement. Even news or a slight hint of any business change can bring an up and down movement to the prices. 

For example: After Airtel was alleged for misusing their clients Aadhar details their share price dropped by nearly 1%. 

Money Talks:

Money talks

The RBI has certain tools to control inflation in the country. One of them is their power to change key lending rates (a.k.a repo rates). When businesses need money they go to banks for loans. Similarly, when banks need money, they go to the central bank for financial aid.

Repo Rate is the rate the RBI  charges for giving money to banks, and reverse repo rate is the rate at which banks get an interest for depositing their excess money with the RBI. No,w these rates affect businesses because if banks borrow at a higher rate from the RBI they will make borrowing for businesses also expensive. 

The RBI reviews these rates every 2 months. A decrease in rates means borrowing at a cheaper rate which benefits businesses. But an increase in rates means borrowing at a higher rate and business will take a setback.  And good business influences the share price to go up while bad business influences it to go down.

Changing Seasons:

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Most Indian companies depend directly or indirectly on agriculture. A good monsoon is always favorable for agriculture and that is positive news to all companies. That’s why stock prices rally up. On the flip sid,e a drought or famine has the exact opposite reaction. Even serious natural disasters like a flood, cyclones can have a negative impact on stock prices. 

Crazy Currencies:

Returns to expectThe Indian Rupee keeps fluctuating. When the rupee weakens it gives the exports a boost because Indian goods become cheaper in foreign markets. If the rupee hardens its good for importers as they need to shell out lesser rupees for their imports. And India imports more than it exports. That’s why a stronger rupee only means upward movements in the stock markets.

Popularity (a.k.a demand and supply):

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This is the most common way that a trader understands if the stock is worth the buy. The demand of a stock can tell a person a lot about the stock. When you see that more people are buying stocks there is an increase in the price of that particular stock. On the other han,d we also see that the stock price ofthe company decreases when these are more sellers wishing to sell their shares. Example: When everyone heard about D-Mart shares being listed people started buying it and the stock markets went up.

Gossip, rumors and the news:

Gossip and news.gifNews is a factor that causes a lot of speculations in the markets. When a company’s name is seen positively in the news people invest all their money into that one stock causing a rise in the stock price. There are times when news also brings a negative impact on the market, making people disinvest their money. Bans on various substances can also cause havoc in the market. Example: The minute news of a note ban hit the country, stock markets went down. Similarly, with the government announcement to help failing banks, bank stocks went up

Attention from foreigners:

AttentionThere are 2 ways in which the Indian economy gets attention from foreigners: One is through FDI-Foreign Direct Investments and the other is through FPI-Foreign Portfolio Investments. FDI is when foreign companies directly invest in India by setting up their factories or stores. Example: Zara, Mcdonalds, Tesla etc. FPI is when they invest in our stock markets. Increase in FDI is a good thing because more forex comes into the economy driving our markets up. However, when these FDI’s pull our during a crisis in their country it means a major downward trend for our markets. Similarly with FPI’s also more money means our stock markets will rally up and visa-versa. 

A few years back our markets were highly dependent on foreign inflows. When they pumped in money our markets were up but the minute they removed their money markets went down. But today foreign inflows don’t have that much of an impact on the markets only because domestic players have increased. People are investing  more in stock markets through mutual funds or directly than they used to before. 

The world and its shenanigans:

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Globalization means all economies are dependent on one another. And that’s why a negative movement in one part of the world can lead to a negative trend in India. Example: After Trump won the U.S. elections stock markets in India were not so good. Similarly after Brexit-(Britain’s Exit From The EU) was announced Tata shares in India dropped because Tata has major investments in the U.K. 

P.S.- Whenever there is an announcement or news of something and the stock markets react to it, at the time of the enactment of the announcement the shares will not fluctuate much. That’s because the markets have already absorbed the impact of the news. Example: When the government announced to help failing banks, bank stocks went up, when the actual help materializes the stock markets won’t react that much.  

That’s why people often say stock markets are so volatile. Only if you have the mindset to withstand the drama you should invest, otherwise invest for the long run (3-7 years), like Warren Buffet’s quote ‘Buy and Forget’.

 


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