“Stock Market Bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception”
The Stock Markets represent the foundation of how well an economy is functioning & carrying out its operations in the Financial Sector. They act as a barometer for measuring the performance of a firm, the Industry it operates it & the Economy encompassing it. The better the results of the firm, the better the economics of the Country. The main element that defines the Stock Market is ‘Risk”. Risk can be defined as the ability or willingness of a person to invest his/her money into the Investment Corpus based on the rate of return they expect. There is always a risk-return tradeoff in everything. The higher the risk, the higher the possibility of profits/losses. The Stock Market has three kinds of people – Speculators, Hedgers & Risk Neutral People.
Just like there are two sides of the same coin, the Stock Market also has both negative & positive perceptions surrounding it. Owing to the huge losses during times of financial emergency, including the 2007-08 credit crisis or the Dot.com bust of 1999-2000, stock markets have caused huge complications for the investors who lost around 50-70% value of their investment corpus. Time & time again the stock markets have crashed proving the vulnerability & quandary they possess. Speaking emphatically, Stock markets are the authors of wealth creation. Speaking of examples like Warren Buffet & Benjamin Graham, the two most successful people in the history of stock market, we can imagine the miracle that it can create for investors. Warren Buffet’s historic investment at Berkshire Hathaway has taken the stock from $19 to $3,00,000. There may be many complications in the process, but ultimately it all depends on the quality of decisions the investor takes. Subtly speaking, different people have different perceptions about the Stock Market. It can be regarded as the most subjective topic to speak on. The history of various index’s, be it the Dow Jones Industrial Average (DJIA), or the S&P500, proves the uncertainty it possesses. However, if proper market research is undertaken & right decisions are made at the right time, it can act in favor of the client.
There a number of factors that affect the stock market, be it economical, psychological or political which incorporate different sectors.
The Economic factors include the stability of interest rates, inflation rates, economic policies & many others. The government plays an integral role in maintaining the integrity & performance of the Stock Markets. The interdependence of the markets & the economy is determined by the performance of various listed, multinational organizations. Various monetary & fiscal policies come into play as the Central Bank tries to regulate the operations of the market. Open market operations, Bank rate etc. are two of the most important tools.
The Psychological factors include the Investor sentiments & emotions. The features of strong investor confidence & optimism during times of economic boom and weak confidence & pessimism during recession explain how quickly they can bring a change in the functioning of the market. The concept of herd mentality also comes into play where information motivated investors are followed by masses of people which ultimately leaves the prices unaffected.
The political factors include the Government intervention in various operations by one means or the other. International Relations with other economies can affect the stock prices as well & can cause complications in the Stock Market. (The Turkish Lira Crisis, 2018) Trade wars, political factors, amendment in policies are some of the elements that need to be regulated to ensure the integrity of the stock markets.
Fear & Greed
Fear & Greed are the two most influential factors in the Stock Market. It’s the volatility & vulnerability of the market which adds this feature to it. People are affected by investor sentiments & emotions pertaining to the up & down moves in the market. Moreover, the bandwagon effect has a major bearing on its functioning as people generally believe in what others do. There’s something called the Fear & Greed Index formulated to inspect Investor sentiments in different situations. It’s the common approach of people to start investing more as they get higher returns & totally put a hold on it when they lose something on it. It’s the risk-seeking characteristic of an individual which defines his/her fear & greed index. The quality of decision-making may be dependent on the knowledge possessed by the Investor, but it ultimately lies on the judgment & divergent moves that are difficult to predict & decipher.
As we know that almost everything in this world has two sides, Stock Markets also have their pros & cons. It depends upon the investor whether he adopts the positive side of it or the negative side. Stock Markets should not be looked upon as gambling because that has a totally different inference. A person empowered with knowledge & some fortune can easily make profits from the investment process. It plays an important role in shaping the dynamics of a country & its business operations. The growth of the Stock Market defines the growth of the country & helps serving the desires of people to invest in big multinational companies. It acts like a channel of communication between the management & the publics and explains difference in views people express about it. At the end of the day, swings in the stock market are created by human beings. There are boom periods in improving markets when everyone wants to buy. Alternatively, there are also periods of haste when almost every investor is looking to secure their positions & take a back seat.