The ‘time in force’ terminology is used most relevantly in the case of traders and investors connected with the stock market. It refers to the period during which a particular price remains active, for purchasing or selling of securities, until it gets rescinded by the investor or gets executed. It expires at the end of every single trading day and gets renewed only with a different day order.
We are all aware of the volatility of the stock market, but not many of us know what influences the prices of shares and their erratic nature.
Even though there is no hard and fast rule or a clean equation to work out how a stock price would behave on different occasions, the general trend of soaring share prices is visualized when the prospects of earning dividends on them are high. In other words, the rise in stock markets is directly proportional to the percentage of profits that firms make in a financial year.
None-the-less, that is not the only driving force for changing market scenarios. There are many other factors that directly or indirectly determine stock market behavior. Let us take a look at them closely.
Factors That Influence The Stock Market
Government policies – The financial marketplace experiences a profound impact in lieu of the fiscal and monetary policies that the government undertakes to ensure the overall economic development of a country by large. By implementing monetary policies like increasing or decreasing interest rates, it can effectively slow down or attempt to speed up growth within the country.
Again, fiscal policies can be introduced if government spending increases or contracts for some reason. This way, governments can intervene and alter interest rates to stabilize prices and check upon how much investment flows in or out of the country.
International transactions – The strength of a country’s economy and its currency is majorly impacted by the flow of funds between countries. More the money leaving a nation, weaker is its economy and currency and vice-versa. Countries that export goods and services, predominantly, bring in more foreign currency that keeps adding on to their overall economic growth as this money can be reinvested and lead to stimulation of its financial markets.
Supply and demand – The demand and supply quotient for goods and services, currencies, and other investments tend to create a push-pull dynamic in prices. Major fluctuations are seen when demand and supply quotient changes, thereby causing a steep rise or fall in prices and rates. If demand increases and supply shrinks, prices tend to rise.
Inversely, if supply goes up beyond the current demand, prices fall drastically. However, supply kept relatively stable, the increase or decrease in demand can accordingly higher or lower the price of a commodity or service, thereby influencing the financial market majorly.
Speculation and expectation – The two most integral parts of a financial system are speculation and expectation. Investors, politicians, and even consumers hold certain views about where the economy would stand in the future and plan their present-day actions accordingly. Hence, the expectation of future action is largely dependent on current acts. This shapes both current and future trends of the market.
Also, a piece of positive news about future economic growth instigates investors to buy more shares while bad news makes them sell-off present stocks. This explains why, in the depth of a recession, the share market begins to rise. Investors try predicting the future, and if they feel the worst is gone, they can make the stock market rally even in the event of poor economic fundamentals.
Stability – The stock market is very sensitive to shocks and unforeseen events that may be likely to occur in the near future. It can majorly threaten its economic stability and retard future growth.
That justifies why stocks start crashing on the news of a terrorist attack or spikes in oil prices on the international forum. Even political instability can cripple strong economic policies from taking off.
Inflation – Inflation acts as a huge driver in determining the action and reaction of stocks at the financial crust. From a technical perspective, low inflation rates have a strong inverse correlation with stock valuations. Alternatively, deflation signifies a loss in the pricing power for companies and is generally bad for stocks.
Demographics – There are two dynamics that have been balled down to show the demographics of investors. One, middle-aged, peak earners tend to invest the maximum in the stock market. Two, older investors tend to pull out of the stock market in order to meet their retirement demands.
Hence the hypothesis – the greater is the proportion of middle-aged investors amidst the investing population, the higher would be the demand for equities and greater the valuation multiples.
The economic strength of markets and peers – Company stocks tend to track and sync with the market and also with their sector or industry peers. The majority of stock movements are determined by a combination of the overall market and sector movements, as opposed to a company’s individual performance. Research has proven that economic factors account for 90% of these.
For instance, a sudden negative outlook for a certain retain stock mostly hurts other retail stocks as well. This happens as ‘guilt by association’ pulls down the demand for the entire sector.
To sum it all up, the above-mentioned factors influence stock prices and the financial market as a whole, some in the short run while others in the long run. All these areas affect day trading rules and are inter-linked, just as future conditions influence current decisions, and these current decisions shape current trends.
Where government policies impact present trends, present trends affect international transactions, which in turn affect economic strength. Future prices are driven by speculation and expectation, while demand and supply changes create trends that push market participants to fight for the best prices.