Investing can be a good way to bolster your finances. This works by buying assets that are projected to increase in value and then selling the assets for a profit. There is the potential for greater returns on your money than keeping funds in a traditional bank account, but there’s also greater risk. While bank account interest rates are relatively stable, other assets can fluctuate in value quite significantly.
Stocks are a key part of a healthy investment portfolio. This involves buying and selling shares in companies that are part of the stock market. You can get started on your own, or you can look into funded trading programmes that provide financial backing and expert advice on playing the market.
Before you dive into stocks and shares trading, educate yourself on the most influential factors shaping the stock market and how these can affect trends and impact investor confidence.
1. Economic indicators
Economic indicators are datasets that suggest the economic health of a nation. Financial experts use this data to forecast the future of that country’s economy, and how this could impact stocks with a connection to that country.
These indicators include Gross Domestic Product (GDP), the Consumer Price Index (CPI), currency strength, interest rates, and unemployment.
As stock trends are an early reflection of these shifts, the stock market itself can be considered an economic indicator.
2. Company earnings
How much a company earns affects its position in the stock market.
Generally, companies with larger profit margins have a higher price in the stock market. This is because they’re seen as more stable, and therefore less risky for investors.
However, companies with small profits can be high priced stocks too. If analysts approve of the performance and growth and predict earnings to soar in the future, an emerging company can earn this low-risk high-value status too.
3. Global events
Major global events can have a significant impact on the worldwide economy. War is a prime example of this: damage to infrastructure, blocked trading routes, and a loss of international investment can restrict or halt GDP growth for the invaded countries.
Other nations that are associated via trade with the affected countries can also experience negative economic impact. Consider the recent fuel crisis which spiked gas prices in Europe following Russia’s attack on Ukraine.
Companies that are affected by global events will rapidly become high-risk, low-value investments, potentially causing a sizable and unpredicted shift in stock market trends.
4. Monetary policy
Monetary policy is set by a nation’s government and central bank. This controls how much money is in the country’s economy.
Tighter monetary policy tends to cause a decline in stock market value. This is because companies have a more restricted cash flow, reducing their profits and chance for growth. It also limits the funds that consumers can put into their investment portfolio.
An example of this is employing higher interest rates to slow inflation. This makes borrowing more expensive and reduces household wealth in real terms, slowing national spending to bring down rising prices.
During these times, fixed savings options such as bank accounts and bonds are seen as more attractive by investors as they are more stable with a guarantee of a good return.
