Stock prices are affected by market forces fluctuations. It depends upon the nature and the extent of the forces causing a drive in the prices. In the following article, it is aspired to describe some of the most important and dominant causes of change in stock prices in any economy. For instance, in the upcoming sections you will learn how demand and supply, political instability and economic recession can affect the share prices negatively and positively.
Demand and Supply Forces
Demand and supply in the stock market works in same manner ,as it works in the general market. Demand of a share has a direct relationship with the price of a share e.g., if demand of the shares of Nestle increase, the share price will ultimately be increased whereas the supply has an inverse or indirect relationship with the stock prices. However it is assumed to be a perfectly efficient market indeed. An efficient market indicates the firm’s operational performance via stock prices. Nevertheless if the technical analysts anticipate good news about firm’s performance through the market signaling, they will start buying more stocks (increase in demand) even at high prices as they have a guess that the price will have steep increase in upcoming days.
Political instability and uncertainty in law and order has a negative impact on share prices. The higher the instability the lower the share prices and ultimately in the extreme situations, the consequences are as worse as stock market crash. For example, if we take an example of the current scenario in Egypt, the Egyptian stock market was immediately crashed when the army took over the Morsi administration. Market observed a slump of an aggregate of 21.8%. International investors withdraw their investments at the very first to reduce the risk of investment loss. Vice versa is the case when politics is quite stable, for illustration, on February 24, 2014, Egyptian market scrutinized 1.67% rise after the news of confirmation that Abdel Fattah el-Sisi will remain the defense minister: a complimentary precursor for persisting and perspective investors.
Economic recession is generally referred to a situation when leading institutions of a country go collapse. It is basically a contraction in business cycles throughout the economy. It has direct relationship with the share prices. When economic recession begins in any country, the foremost effect is found on the stock markets as firm become unable to generate profits. There might be several reasons behind an economic recession for example, economic policies, natural disasters, energy short fall, warlike situation or international influence. The greatest economic recession following by a huge stock market collapse can be found in the history of USA economy in the name of world economic crash 1929. On a Tuesday, also known as a black Tuesday, the Wall Street got crashed and unemployment rate in the economy rose up. It caused a six fold downturn in Dow John Industrial Average which was found as lower as 66%. The second most noteworthy stock market crash has been recently observed in 2008 followed by a mortgage crisis. Market observed a slouch of 77% contraction. The leading financial institutions got bankrupt in USA. Stock prices touched the lowest surface and finally the market crashed. In the history, there are many recessions and market crashes can be found overridingly. The phenomenon behind the scene is the firm’s inability to perform in the anticipated manner leading to the ultimate lessening stock price.