If you regularly invest in stocks, or even if you just dabble, you know prices are never stagnant for long. Individual stocks might surge or deflate due to issues with that particular company, but global factors can affect stock exchange prices as a whole. These factors don't drop and lift prices all by themselves, but they often affect the emotions of investors. Wholesale panic or avarice will almost invariably affect trading.
When the economy itself fluctuates or falters, it impacts the stock exchange. The market might initially drop due to economic factors, then this creates an emotional chain reaction. The triggering factor might be an increase in interest rates by the Federal Reserve Board, or reports of inflation. When investors believe the economy is in trouble, they're understandably less willing to take risks with their money, so they may divest from stocks and build up holdings in more conservative investments, like money market accounts or Treasury notes.
National and global events do not necessarily have to affect the economy first before they affect investors’ emotions and their relationship with the stock exchange. Immediately following September 11, 2001, the stock market felt the impact before the overall economy did as people pulled back in shock. With the country potentially on the brink of war, many investors were concerned about how this would affect their own finances and the overall economy. When they did begin investing again, they continued to stay away from investments perceived as riskier. Other large national and global issues have the same effect, such as the United States’ federal budget issues, the election or appointment of a government head that might affect that nation’s economy, natural disasters that might siphon off a great deal of a nation’s economic resources and unrest in the Middle East.
Rumors and Hype
The stock exchange is also susceptible to intentional manipulation. This can have a “pull-along” effect. A leak here or there to the media regarding positive or negative internal events can sink or buoy the price of a particular stock, even if the leak has no basis in fact. If several publicly-traded companies experience similar trends in a defined period of time, totally unrelated stocks might also experience a surge or drop from the overall mood created. In all likelihood, they’ll eventually right themselves again. However, investors watching other stocks perform well are more likely to spend money across the board, at least temporarily, before selling again.
Sometimes the stock market itself is responsible for upward or downward swings in performance. Generally, this is the result of other external factors, but the effect is tangible all the same. When other factors combine to create a bull or bear market, investors react accordingly. In a bear market, they may become fearful and sell en masse. In a bull market, they’ll feel hungry to claim a piece of that action for themselves. The entire stock exchange can be affected accordingly.
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