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News - 3 October 2011

Why does the Stock Market Fluctuate? Part One.


People have wondered about and attempted to analyse the factors that drive the stock market since trading first began at the London Stock Exchange more than 300 years ago.

While there is no one definitive answer, there are factors that are known to have a positive or negative impact on the equity markets, both on a daily basis and over a longer period of time.

In this two part examination of the ever changing stock market, in part one we will look at the impact of Supply and Demand, The Economy and Interest Rates.

In part two of this exploration, we see what influence Individual Investors, Programme Trading, Psychological Issues, and the effect of Commodity prices has on the Stock market.


Supply and Demand

One of the major influences is Supply and Demand. Stock prices will tend to appreciate in value as demand picks up and the supply of stocks for sale decreases. Likewise, if demand for a particular issue is low and the supply or volume of stocks for sale in the marketplace is high, prices will tend to decline.

The Economy.

On a basic level, when the economic climate is flourishing, investors of all types (retail and institutional), generally have money to invest as they choose. As they put their money to work by investing in individual issues and mutual funds (which often hold positions in dozens and sometimes even hundreds of issues) equity prices tend to rise.

On the flip side, during a recession or a period of slow economic growth, investors will be more reluctant or even unable to commit to investment. This can lead to a decrease in demand for equities and a subsequent decrease in stock prices.

The recent global recession of 2008 and 2009, which was prompted by the sub-prime mortgage business in the US and the issuing of high risk loans, saw markets across the world crash and investment grind to a shuddering halt.

London's FTSE 100 index suffered hugely, with it and other global institutions experiencing their most significant market falls since the terrorist attacks occurred in New York and Washington on September 11th 2001. Many experts are saying that markets across the globe have yet to fully recover.

 

Interest Rates.

Lower interest rates stimulate borrowing by investors, individuals and companies. This in turn can lead to economic expansion, an environment in which spending and investing is common. Also, in theory, because consumers may have more cash, they all tend to spend more at retail locations, which drives up corporate profits and any affiliated stock prices.

The opposite can also be seen, as interest rates rise, individuals and companies tend to borrow and expand their businesses less. This can translate into less spending and investing. It may also put a damper on consumer spending and force corporate profits to decline or level off.

If you need any help and advice on Inheritance tax, capital gains Tax, or any other implications with Stocks and Shares, don’t hesitate to contact Lavinia Newman, Stuart Coleman or Tonmoy Kumar to discuss how ABDS can help in all your financial planning.

ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900  E-mail: abds@netaccountants.net

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