Everyone has investment objectives in life while planning and achieving continuously the same as a part of their necessities. The stock market presents itself as one of the best ways to earn more profits on your investments.
However, the share markets are very volatile. If you are not up-to-date with the economic events, cautious with your risk appetite, and conscious of critical market data, you will find it difficult to build your trades wisely. One wrong calculated move can take you down to deep losses. That is why it is essential to understand the factors that influence the market, and in what ways they do.
Despite the volatility, the dynamic nature of the stock markets attracts investors and feeds their risk appetite. To overcome the volatility and stay in profit, you will have to keep your eyes open. It would be best if you kept a close eye on every significant incident happening in India as well as the world. An investor must have good analytical skills to determine whether that incident will drive the stock markets’ prices up or down. Let us understand how important events affect the stock markets…
13 Must-Know Factors that Influence the Stock Prices
Every time the graph of listed companies’ stock goes dramatically up or down, we are taken aback. However, you will find a strong reason behind such fluctuations if you look closely. The reasons might be political election results, RBI policies, government schemes, international events, or key statements made by influential personalities of the state.
Every stock has a company behind it and a concrete reason for how the company is performing on the share markets.
To conduct an actual forecast in the future, take a look at the factors that impact the Indian share markets the most:
1. SEBI regulatory policies
SEBI stands for Securities and Exchange Board of India. It is responsible for regulating the companies in the share market. In addition, SEBI ensures fair market play in the Indian stock exchange.
SEBI keeps an eye on the entire stock market. It evaluates how the stocks of every company are performing in the market. The agency has also set several rules and regulations to monitor any discrepancy in the stock market fluctuation.
Companies and stock whales try to influence the stock market through illegal practices. SEBI identifies these trades and safeguards the interests of the investors. It has employed measures like the screen-based trading system, the T+2 rolling system, dematerialization of the securities, strict rules to regulate intermediaries, trading and issue of securities, and corporate reconstructing.
SEBI constantly works to curb insider trading and other unethical trading practices. For example, the agency approves the by-laws of the stock exchanges. In addition, it brings domestic companies and foreign corporates participating in the Indian securities market under its surveillance.
SEBI enjoys quasi-judicial, quasi-executive and quasi-legislative powers in the stock market. With such power under its control, any changes in the regulations influence the share market. Even if SEBI makes small changes in the regulations of the share market, the stock prices are shaken up.
For example, SEBI has come up with strict share buyback rules to protect the interests of small investors.
Companies launch buyback programs and wait for the right time to carry out the transactions. They are looking for the prices to go up so they can enjoy maximum profits.
Previously, the waiting period was 12 months. However, SEBI has reduced it to 6 months. It has also been made mandatory for the companies to buy back 50% of the offer. Moreover, they will have to keep 25% of the offer in the escrow account. Companies that fail to meet the regulations will be penalized with up to 2.5% of the amount in the escrow account and a 1-year ban.
This rule will force the companies to complete the process in a shorter time. It will also stop companies from making non-serious offers.
2. RBI monetary policy
RBI is another government agency that significantly impacts the shares. The Reserve Bank of India, or RBI, is the central bank of India. It regulates the money supply and all the banks in India.
The agency formulates the monetary policy and controls the repo and reverse repo rates. Therefore, any change in the repo or reverse repo rate affects the stock prices exponentially.
The primary function of RBI is to balance growth and inflation through interest rates. Interest rates make a country’s economy go up or down. If the interest rates are high, corporates cannot easily take loans. Due to the unavailability of loans, the growth of the company is hampered. Ultimately, the stock prices of the company go down.
The RBI analyses and revises the repo rate, reverse repo rate, and cash reserve ratio every two months. Investors and the entire share market keep a lookout for the RBI’s decisions. Shares of sectors like banks, housing, automobiles, and real estate are most affected whenever the RBI revises its interest rates.
3. Government policies
The stock prices also depend on government policies and schemes. Every government, from time to time, implements new schemes. Be it welfare, finance, military, or governance-related policies – they are destined to affect the market.
When the GST bill was passed in both houses of parliament, the stock market went crazy. The Sensex and Nifty closed at higher points. The BSE Index Sensex was up by 0.81% and was up by 16.86 points.
The Nifty dropped by 2.1% when the Indian Army carried out surgical strikes on Pakistan. As a result, the market rolled down to its most significant decline since Brexit. Several experts believed that a series of strikes from both sides would elevate the tensions between the two nations.
Similarly, the demonetization of Rs500 and Rs1000 notes in 2016 crashed BSE Sensex by 1689 points. However, the Nifty was up by 541 points on the government’s withdrawal of higher denomination notes.
Finance Minister presents the budget every year, which contains the country’s economic plan. In addition, major economic and financial reforms and schemes are announced during the budget session.
The budget plays a crucial role in shaping the country’s finance. That is why it is the most influential factor in the share market.
In the budget 2021, the Nifty and Sensex were up by 7.74% and 5%, respectively. Finance Minister Nirmala Sitaraman had announced Rs. 223846 crores budget to the healthcare sector. Its impact was visible on the top pharma stocks like Cipla, Aurobindo Pharma, Sun Pharmaceuticals, and Divi’s Lab. Sun Pharmaceuticals and Divi’s lab stocks were up by 0.67% and 2.78%, respectively.
The budget 2021-22 focused on financing declining power distribution companies. The Finance minister also announced the launch of the National Hydrogen Mission and National Infrastructure Pipeline. Observing the government’s interest in the energy sector, the stocks prices of top power generation and distribution companies surged high.
Inflation is the rise in the prices of goods and services. A high inflation rate in the country discourages investment and slows the economy. Companies that are struck with inflation cancel or postpone their major projects.
The stocks of companies fall as no one wishes to invest in them. The market graph also goes down due to a loss in the company’s growth. Inflation affects both investing and purchasing power of people.
6. Exchange rate
The value of the Indian rupee fluctuates continuously with other currencies. Indian goods become more expensive in global markets when the rupee is strong.
The companies dependent on export are affected as the demand for their products fall in the global market. As a result, export revenue goes down, and the stock values of such enterprises fall in India.
On the other hand, when the rupee weakens against foreign currencies, the stock price of exporters rises, and the stock price of importers falls.
7. FIIs and DIIs
FIIs stand for Foreign Institutional Investors. FIIs are a type of investment or fund from foreign investors or companies to the nation’s companies (in this case, Indian companies). So in a way, foreign investors support the Indian market by investing their assets in the country’s companies.
DIIs stand for Domestic Institutional Investors. Unlike FIIs, DIIs invest in the companies of their home country (in this case, India).
FIIs and DIIs mainly invest in securities, pension funds, hedge funds, mutual funds, and multinational insurance firms. Due to their large purchasing and selling capacity, they are known as market movers.
People focus more FIIs as they have efficient research teams and more buying power. However, India has put a limit on FIIs investment in equity and stocks in a single firm. It ensures that foreign investments cannot have superiority in influencing companies’ stocks and the Indian share market.
Nowadays, domestic investments are shaping the Indian stock market. However, the FIIs still remains India’s major source of money.
8. Index of Industrial Production (IIP)
The Index of Industrial Production (IIP) is released every month. It indicates how the country’s industrial sector is progressing. It measures the Indian industrial data using a reference and also releases inflation data.
A higher IIP is a sign of positive progress of the Indian economy and industrial sector. It shows that the industries are flourishing at a rapid pace.
A low IIP is like a bad omen for the share market and economy. A sluggish IIP shows that industrial progress has slowed down. A decreasing IIP puts RBI under pressure to lower the interest rate to support the economy and lower inflation.
9. Purchasing Managers’ Index
The Purchasing Managers’ Index (PMI) is a business indicator that measures activity across the manufacturing and service sectors of the economy. It is a survey-based indicator in which buying managers express how their business perceptions have changed over the past month.
The service and manufacturing industries each have their own survey. The survey’s results are compiled into a single index. New orders, output, business expectations, and employment are some of the topics covered in the survey.
The PMI fluctuates around 50 in most cases. A number of more than 50 implies that the economy is expanding, while a reading of less than 50 suggests that the economy is contracting. And a reading of 50 indicates that the economy has remained unchanged.
10. Corporate Earnings Announcement
The corporate earnings announcement plays a crucial role in shaping the future of the company’s stocks. It is released once every quarter where companies declare their earnings and profits.
The announcement includes the revenue generated, expenses, profits, taxes and interest charges paid by the company in that quarter. Stock prices go up if the company’s earnings exceed the street expectations.
Similarly, if the company fails to meet street expectations, the stock graph goes down. However, the stock value remains flat if the company’s earnings are in the same range as street expectations.
GDP stands for Gross Domestic Product. It is the measure of total goods and products manufactured by the country in a year.
GDP is an essential indicator of a country’s economy. Therefore, any change in the GDP directly impacts the stock market.
A higher GDP shows a healthy Indian economy, and thus the stock market booms. Conversely, a lower or negative GDP indicates a declining economy. The stock prices fall sharply in such cases.
GDP had a positive growth during 2013-2018, which took the NIFTY 50 Index graph up. India’s GDP was constantly growing from 2012 to 2016. Then in 2017, the GDP started to decline, which slowed the economy.
The GDP in the first quarter of 2020 saw positive growth of 3.9%. The economy had started to progress when the COVID pandemic struck in India, pushing GDP to -23.9% and -8% in the second and third quarters of 2020. It was the time when the whole world was under lockdown.
12. Natural Disasters
Major natural disasters like earthquakes, floods, and pandemics affect the lives of all people. Thus, in turn, it also impacts the stock market.
In 2020 when the COVID pandemic brought the entire world under lockdown, the economy of countries around the world struggled to survive. Industries, manufacturing, transportation, entertainment, and markets were shut down.
The country’s economy and GDP had a major blow. Small companies and start-ups failed due to a lack of workforce and funds. As a result, people lost their jobs and were unable to pay their EMIs.
BSE Sensex and NSE Nifty fell by 38% after the outbreak. Health, apparel, entertainment, tourism and hospitality industries had a significant fall of 40%.
The BSE Sensex has experienced the most significant single-day drop of 13.2%, surpassing the notorious April 28, 1992 drop. Nifty has also seen a sharp plunge of 29%, surpassing the calamity of 1992. Only the FMCG company had demonstrated a positive return as customers have reduced their consumption to only necessary products, while other companies have seen a dramatic fall.
However, the shares of vaccine manufacturing industries like Moderna, Pfizer, and BioNTech plummeted to new heights. Moderna shares witnessed a growth of 700% in 2020 as it successfully tested and developed the corona vaccine. The value of Moderna trades went from $20 to $484.47 in 2021.
13. Impact of World Events
World events such as war and civil unrest, natural catastrophes, elections, critical announcements, and terrorism can affect company stock prices and the stock market in general. These directly or indirectly affects the market and occur in chain reactions.
If a country announces a military venture to curb terrorism in another country, it affects the arms manufacturing industries. This is because several defense contracts will be given to major producers of weapons. As a result, the arms manufacturing companies will flourish, and their shares will rise in value.
It will also create a demand for resources and raw materials used to build the weapon parts. Thus, influencing other business sectors as well.
Stock prices are subject to fluctuate due to several factors, including the ones stated above. Therefore, an investor should consider all the points before investing in the stocks of a company. In addition, one should always keep an eye on what is going on in the country and the world. Any minor or major event can take your trades to profit or loss.