Why does Stock Market Price Rise and Fall?

Stock markets are known for being a risky investment. It is this very unpredictable nature that makes stock markets an investment option that offers high returns as well. The fluctuation in the performance of the stock markets can be a cause of trouble or elation for many.

It has been said that equity trading is not for the weak hearted nor is it like a gamble. It is for people who are well aware of the workings of shares and know when it is the right time to invest. Though the stock market price fluctuations majorly depend on the demand-supply factor, other factors also play a vital role in influencing the prices. In order to help you get a better understanding of the price fluctuations in the stock market, here is a list of 5 factors that regularly affect the stock prices:

1. Firm-related factors

   Any change in the company attributes makes its prices volatile. Increased sales revenue, fall in the cost of operations, product launch, repayment of debts, etc. increase future cash flows of the company. A grand launch of a new product line or good performance in overseas markets will see the stock of a company rise. The demand for shares of these companies grows. Hence, positive factors lead to a rise in stock prices.

   Negative factors constitute product failures- change in top management, high employee turnover, fall in sales revenue, etc. adversely impacts the company’s productivity and future earnings. Investors abandon shares of the loss-making company. It results in fall in the stock of the company.

2. Monetary policy of RBI

   RBI reviews its monetary policy every couple of months. Any increase/decrease in Repo and Reverse Repo Rates changes the stock prices. When the RBI raises the key policy rates, it reduces the liquidity in banks. This, in turn, makes the banks increase the lending rates. Investors see this as a stoppage in the bank’s progress. They start offloading the shares of a company which reduces its stock prices.

   The reverse of this happens when RBI follows a dovish monetary policy. Banks tend to decrease the lending rates. This leads to credit expansion. Investors perceive this as a positive sign and stock prices automatically start rising.

3. Exchange Rates

   The exchange rates of Indian Rupee keep fluctuating with respect to other currencies. When the rupee grows with respect to other currencies it sets a multi-dimensional chain reaction. It causes Indian goods to become expensive in foreign markets. Companies drastically affected are the ones involved in overseas operations.

   Companies dependent on exports experience a fall in demand for their goods abroad. This leads to decline in revenue from exports and a subsequent fall in stock prices. Importing companies shell out lesser on imported goods which reduce their production cost. This reduction in cost will reflect in their company profits making their share prices shoot up.

4. Political Changes

   Political events especially Prime Ministerial elections have a big influence on the stock market. The release of the financial budget every year gives different sectors of the stock market a boost while it sees the stock of other sectors drop. These changes happen based on new government policies being proposed or implemented.

   A headstrong government with a clear financial roadmap for the country will see a growing stock market. In addition to this, politically unstable situations like wars and riots will see a drop in stocks as people are less likely to take risks.

5. Natural Disasters

The severity of natural disasters has grown in the last few years. Droughts, earthquakes, floods and so on cause displacement of a large population and leave destruction in its wake. Another facet of a natural calamity is the slowing of economic growth of the country due to damage done to its financial resources like factories, machinery, and manpower.

Apart from these, there are few other factors as well that affect the prices of the stock market in India. These include the prices of gold in the country or even the expectation of the good or a bad monsoon season.