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Several factors affect the health of the stock market and how much a trader or investor profits from their stock market investments. A few of the most prevalent factors that influence the stock market include inflation, trends, and the state of the economy. Here, we explore these factors and explain how they directly impact the overall health of the stock market.
Inflation is one of the primary technical factors that affect the stock market. Inflation is a measure of the rate at which stocks and other financial instruments increase in price over a period of time. As a result of inflation, stock prices rise as the value of the United States’ currency decreases. Some stock owners prefer to see inflation as it raises the value of their assets. When the opposite of inflation occurs — known as deflation — companies suffer from a loss of pricing power.
Changes in the economy — often referred to as depressions and booms — directly impact the health of the stock market. When the economy is experiencing a boom, or a period of increased commercial activity, share and stock prices are at their peak and worth more. This means that investors and traders will profit more from their stocks and trading activities.
However, when the economy is experiencing a depression, or a period in which the economy experiences a decrease in economic activity, stocks are worth less and investors don’t profit as much or at all.
Stocks tend to move up or down based on short-term trends in the stock market. When a company becomes more successful and popular among investors and traders, that stock will gain momentum and cause the value of the stock to rise. However, when a company is unsuccessful or falls in popularity, its shares will decrease in value.
This decrease in value is referred to as reverting to the mean. Because trends often happen quickly and can go both ways, trends aren’t always a good measurement for investors to base their decisions on.
Liquidity is a term used to describe how easily a stock, share, or other financial assets can be turned into cash. Most bonds and stocks are considered to be very liquid due to the fact that they can easily be turned into cash within a matter of days. However, some investment assets are not as liquid because they have covenants that determine when and how they can be sold.
When it comes to the stock market, liquidity is used to describe the amount of interest shown by investors in a certain stock. The more interest investors show in a particular stock, the more liquidity it has. Higher liquidity results in a stock being of greater value.
Large companies like Apple are considered to be highly liquid and see high amounts of trade volume. Smaller companies often have much lower liquidity and therefore have stock that’s worth less.
Understanding the factors that affect the health of the stock market ensures you’re aware of the influences that can impact your investments.
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