Movements in the stock market can be quite volatile and sometimes movements in share prices can seem divorced from economic factors.

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However, there are certain underlying factors which have a strong influence over the movement of share prices and the stock market in general. But, generally shares will be in greater demand when investors have the prospect of earning more dividends. Therefore factors which make firms more profitable will tend to cause a rise in stock markets. Sometimes we see the stock market increase during a recession, but fall during economic growth.

This is because many factors are affecting the stock market, apart from just the basic state of the economy. Part of the reason is that investors are always looking to the future. If they see signs the economy may turn the economy, they may buy shares, even though the economy is in a deep recession. For example, those who bought shares at the end of when recession was at its worst would have made good profits during the recession years of An unanticipated rapid rise in inflation would probably cause a fall in stock markets.

A rise in inflation would probably lead to a greater chance of interest rises. This will reduce growth and profitability.

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Also higher inflation may encourage investors to move into more inflation proof investments like gold. However, during the hyperinflation of the s in Germany, the stock market became one place to keep the value of your savings.

Share prices soared as people put money into shares rather than just hold onto cash. Facebook RSS Follow economicshelp Basket. Tejvan Pettinger May 4, economics.

Underlying Factors Affecting the Stock Market Economic growth. Higher economic growth or better prospects for growth will help firms be more profitable because there will be more demand for goods and services. This will help boost company dividends and therefore share prices.

Lower interest rates can make shares more attractive for two reasons. Lower interest rates help boost economic growth making firms more profitable. Also lower interest rates make shares relatively more attractive than saving money in a bank or holding bonds. If bond yields fall, it may encourage investors to switch into shares which give a relatively better dividend.

Stock markets dislike shocks that could threaten economic stability and future growth. Therefore, they will tend to fall on news of terrorist attacks or spikes in the price of oil. They will also dislike political instability which may make it difficult to pursue strong economic policies. A key factor is the mood of investors. If they receive economic news that gives optimism then they are more likely to buy shares. If they receive bad news they will sell.

This is why in the depth of a recession, stock markets can start to rise. Investors are always trying to predict the future. Therefore if they feel the worst is over the stock market can rally — even when economic fundamentals remain poor.

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At times the stock market seems to over-react to certain events. Even today it remains a little mystery why the stock market fell so much — there was no economic problem. Part of the issue is that people follow the mood.

When prices fall, people may feel the need to follow suit and get out of the market. Often investors have choices. For example, rather than investing in stock market, they could buy government bonds or commodities. If investors feel government bonds are overpriced and likely to fall, then the stock market can benefit as people move into shares.

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