2 Factors that Can Affect Stock Prices

Stock prices are affected by a variety of factors. While the prices of individual stocks are impacted by the decisions of corporate management and the company’s response to changing markets, stock prices are also affected by broader factors that impact the market as a whole. Let’s look at two of them.

Market Sentiment

We know that bubbles based on irrational exuberance and expectations that prices cannot go down date back to at least the Tulip market of the 1600s. Investment bubbles have taken form in local real estate markets, stock market bubbles, junk bond markets and investments in the railroads in the 1800s. The modern world still sees bubbles in the stock market, but it doesn’t last as long because of faster transmission of information and the greater number of competing factors. Stock market sentiments alternate between bull and bear markets, driving prices up or down based on expectations of the market as to which direction it will go.

When prices are going down, many buyers sell simply out of fear it will go down further. When going up, they buy on the expectation or hope it will go up even higher. This trend, once started, continues under momentum until it hits a turning point.

But unlike bubbles of a hundred years ago, or the real estate collapse of 2007-2009, everyone knows the prices can come down and they look for warning signs of the impending change. Ironically, those who earned MBAs from Ivy League schools and built classes of investments on the assumption default rates wouldn’t hit 8% and real estate prices on average could not go down, would have been better off earning a degree from online MBA programs with a real world basis instead of abstract and incorrect theory.

Central Bank Activity

Central bank activity can impact your stock market. When central bank interest rates are near zero and real rates of return on savings are negative (interest rates below the inflation rate), money pours into the stock market in the hope of seeing a rate of return. This is why the stock market in the United States soared during the Great Recession, which never really ended under President Obama. Investors and institutions wanting to see real rates of return bought stocks hoping for dividends or capital gains that were higher than the 1% or less range they’d receive in bonds and other “safe” investments.

Conversely, when official interest rates are high but there isn’t a great risk of government default, then stock prices go down as people move to safer bonds. An online MBA degree program covers the detailed charts that show stock prices relative to real and nominal interest rates.

In summary, stock prices are driven by factors from market sentiments to public policy. Stock prices change in response to expected growth in valuations as businesses pay less in taxes and more to stakeholders, or investors buy stocks simply to see a greater rate of return than they receive in a near-zero bond market.

 

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