Keep an Eye on the Factors That Cause Volatility in Stock Markets

Topics: Stock market, Stock, Economics Pages: 3 (714 words) Published: September 9, 2013
hat question has many answers. Economic factors like GDP and earnings reports, political factors like government policies and political unrest, commodity prices like price of crude oil and gold, social issues like war and terrorism, acts of God such as earth quakes and flood may cause the market to change direction or speed up or slow down its momentum. Most common of them are listed below.

Inflation, Interest rates & Earnings
High Speculative activity
Demand and supply
Oil/Energy Prices ,War/terrorism , Crime/fraud
Serious domestic political unrest
Uncertainty
Inflation, interest rates & Earnings
To put it in simple terms, Inflation is a sustained increase in the general level of prices for goods and services. There may be a lot of reasons for this. It is measured as an annual percentage increase. As inflation rises, every Rupee in your wallet buys a smaller percentage of a good or service. People living off a fixed-income, such as retirees and salaried class see a decline in their purchasing power and, consequently, their standard of living. Uncertainty about economic future makes corporations / consumers spend their money cautiously. This hurts economic output in the Long run As inflation increases, Reserve bank increases the interest rates to reduce the money supply and slow inflation down: When interest rates are high, people find it expensive to borrow, and therefore there is less money floating around. When interest rates are high; people require higher returns on stocks. Its not so easy to just increase earnings for a stock, so its price has to adjust downward. For example : Consider a stock that sells at Rs 100 with earnings of Rs 12, a 12% return. When Fixed deposits pay 8%, an investor may be willing to buy this stock for the extra 4% return. However, if interest rates were to rise, to say 12%, who would pay for this 12% return, when they could get 12% risk-free by Fixed deposits ? Therefore, the stock may drop to Rs 75. With earnings of Rs 12,...
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