Here are the 6 Factors that Affect Stock Prices in India:
The unstable stock prices makes equity investing risky. The risk averse escape the stock market. While the risk seekers invest eagerly in equity for goal achievement.
In fact, volatility carries the essence of stock market returns. The fluctuations enable real price discovery. The risk seeker gets fair returns for the higher risk. An increase in stock price increases investors’ net worth.
On the whole, equity investing isn’t for the weak-hearted. It’s for those who understand the investor sentiment. It’s for those who know why stock prices follow a particular pattern. One needs to recognize price determinants as also identify inter-relationships.
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Each news and update results in a rise/fall in the stock prices. Good news boosts investor sentiments causing the stock prices to rise. Whereas, any setbacks dampens their hopes causing a price decline. There are a number of factors which affect stock prices.
Some factors are firm-specific like a change in management, new product launch, policy change, legal tangles, etc. Others factors are like political, economic, and technological that cause variation in stock prices.
Eventually any event that alters the value of the company impacts its stock prices. If the company becomes more valuable, then its stock prices increase. Any event that erodes company’ value causes stock prices to sink.
Let’s have an in-depth look into determinants of stock prices:
Firm-related factors
Any change in the company attribute makes its stock prices volatile. Increased sales revenue, fall in the cost of operations, product launch, repayment of debt, etc. increases future cash flows of the company. Investors develop an optimistic outlook towards the company. Demand for shares of the company grows. Hence, positive factors lead to a rise in stock prices.
Negative factors constitute product failures, change in top management, high employee turnover, high manufacturing cost, fall in sales revenue, etc. It adversely impacts company’s productivity and future earnings. Investors abandon shares of the loss-making company. It results in fall in the stock prices of the company.
Also read: 7 behavioural biases affecting investor returns
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. Under a hawkish stance, RBI raises the key policy rates. It reduces the liquidity in the banks. This makes borrowing costlier for them. They, in turn, increase the lending rates. It makes borrowing more expensive for the business. The firm may face difficulties in servicing its existing debt obligations as well.
Investors perceive it as an impediment in expansionary activities of business. They start offloading the shares of the company which reduces its stock prices.
A 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 as a positive sign. Stock prices automatically start rising.
Exchange Rates
The exchange rates of Indian Rupee keeps fluctuating vis-à-vis other currencies. When rupee hardens in respect to other currencies, it sets a multidimensional 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. Revenue from exports decline, and stock prices of such companies in the home country fall. Importing companies, on the hand, are benefitted by hardening of the rupee. They need to shell out lesser on imported goods which reduce the cost of operations. It, in turn, increases their bottom-line along with raising their share prices.
Softening of rupee vis-à-vis, other currencies triggers entirely opposite effect. In this, the stock price of exporters rises whereas those of importers fall.
Politics
Political events, especially during the prime ministerial elections, influence Indian stock markets considerably. Before the elections, there’s tremendous volatility in the market. A rise or fall depends on expectations of the voters from the government. A coalition outlook accompanies bear runs in stock prices. On the contrary, full majority outlook makes the market bullish. During the recent PM elections, people pinned up high hopes with Modi government. Markets rallied in the pre-election period which continued even after Modi’s win.
The agenda of political parties also affect the direction of stock prices. A development agenda results in market exuberance. Conversely, an undefined and weak political manifesto makes the stock prices to slide.
Additionally, political instability, the imposition of embargo, war-like situation, and civil riots may cause the stock prices to go southwards.
Natural Disasters
Any natural calamity wrecks havoc on the stock markets.
The frequency and severity of the disasters like droughts, floods, earthquakes, etc. have grown manifold. These not only result in human displacement but also lead to asset destruction. It retards the pace of economic growth of the country. It may push individuals into poverty thereby affecting consumption and investment. Revenue of companies takes a hit due to drop in sales volumes. Consequently, future cash flows may fall and expansion activities may take a standstill.
The occurrence of Natural disasters, thus, results in fall in the stock prices of companies.
Gold Prices & Bonds
No established theory expresses the relationship between prices of stocks and gold & bonds. Before the financial crisis of 2008, a negative correlation was observed between the two. While stocks are risky instruments, gold and bonds are regarded as a safe investment havens. Till 2008, a rise in gold price was accompanied by a slump in stock prices and vice-versa.
After 2008, as the equity markets recovered, returns from gold have remained stable. On the contrary, stock prices have maintained an upward journey. However, you may witness an intermittently increased preference for gold and bonds during uncertainties.
Take the pre-election period in India, the demonetization or US presidential elections, investors were flocking towards safer havens. As a result, gold and bond prices surged while the stock prices continued to decline.
Final Words
Stock prices of a company may rise/fall due to different factors. Ideally, you need to know relationships between stock prices and other variables. It would ensure that you stay at an advantage owing to market volatility.
Disclaimer:
This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.
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