Know the Things That Affect the Stock Market

Know the Things That Affect the Stock Market

15 January, 2024

We are all aware of the intricate and highly volatile nature of the stock markets, making it difficult to predict a stock's future performance. This characteristic of the market impacts not only businesses and individual investors, but the economy as a whole.

These fluctuations make high-intensity volume traders highly vulnerable. It can cause you to be sleepless and worried around the clock. But how are these rapid movements caused and what should you look for while entering a trade?

Factors affecting stock markets

Economic strength

Economic strength has a direct impact on the performance of the country's financial markets. Indicators such as GDP growth rate, inflation rate, spending and unemployment rate reflect economic health. A movement in these indicators causes the markets to respond rapidly.

A positive outlook reflected by strong indicators can boost investor confidence and drive the markets upwards. A downfall in these indicators can cause the economy to look weaker, and investors might draw out of the financial instruments.

You should keep a close eye on these indicators and switch your strategies in response to changes in these trends.

Policies and regulations

A favourable shift in government policies will drive the markets up. An unfavourable one will reduce confidence and cause a downward shift in the markets.

Changes in international trade agreements and their associated tariffs can impact the stock purchasing power of investors. This will impact the competitiveness of the industry and disrupt the supply of international resources.

The government can also impact the overall liquidity of the economy by altering fiscal policy. A contractionary fiscal policy will lower the level of liquidity, driving investor confidence down and making the markets less attractive for investment.

Banking system

The Central Bank has great influence over the level of engagement in the financial markets. An upward movement in interest rates will increase the cost of borrowing and make it less lucrative for businesses to increase investment. It will also lead to a fall in consumer spending in the economy. Similarly, a fall in interest rates will cause investments to rise, and consequently, the financial markets will flourish.

The Reserve Bank of India can directly impact these movements through changes in monetary policy. A relaxation in monetary policy will cause an injection of currency in the economy, increasing liquidity and also, stock prices.

Institutional investors

Both Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) have a crucial role in deciding the fate of financial markets. Any entry or exit decision by these investors causes a significant impact on the equity value.

These investors play a vital role in the price discovery process in the markets. They run thorough research and analysis on securities to drive the markets towards accurate price levels. Due to the high volume of their trades, their involvement helps keep the market at an optimal level.

These investors also hold the power to stabilise distressed market conditions. Due to the high volume of their trades, they have the potential to execute transactions that control price fluctuations during volatility and ensure stability.

Investor sentiment

The confidence level of investors and their behaviour can impact short-term movements in the markets. Negative economic / business news will drive risk-averse investors out of their positions and cause the prices to drop.

The confidence level in the economy will also decide the spending levels and patterns of investors. Negative sentiment will cause the investors to hoard their cash flows in fear of anticipated risk in the future.

International relations and geopolitical volatility

We live in an interconnected world, where any movement in the economic conditions of one nation will cause a domino effect on other economies associated in terms of trade or investment flows. A downfall in one economy can have a scaled impact that goes as far as the global level.

An impact on relations between different nations can also cause political instability and trade tensions. It leads to disruption in the supply chains, moving consumer spending and driving investor confidence to fall.

Forex fluctuations

Fluctuations in foreign exchange rates and the valuation of a currency will have a significant impact on the revenues of multinational corporations. This will directly impact the level of Foreign Direct Investments (FDIs) in the economy, especially for corporates headquartered or having a significant proportion in a foreign nation.

This kind of movement will make the nation less appealing to foreign investors, consequently causing a slowdown in the financial markets.

Natural calamities

Natural calamities bring the highest level of uncertainty in the market. Events like earthquakes, tsunamis and hurricanes can impact the level of production and supply chains within the economy. This will drive down the overall growth, level of spending and liquidity.

Nations more prone to such disturbances will have more risk-averse people, who will prefer hoarding cash for such situations and be less involved in stock markets.

As an investor, you must understand that the stock markets are influenced by a multitude of other variables as well. This makes it a complex and dynamic system continually shaped by a variety of forces. You need to look out for such disturbances to stay well-informed while maintaining your position in the financial markets.


There are a lot of factors affecting the stock market in India. Some of them are easy to monitor and account for in trading strategies, while some are highly uncertain and cannot always be accounted for.

An important factor to consider is choosing the right trading account. The HDFC Bank Demat Account has got you covered for that. This Demat Account allows you to invest and monitor a wide variety of securities, while allowing a hassle-free movement of funds.

Open your Demat Account now.

*Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing.

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