Psychology, as much as business basics, dictates the rise and fall of stock prices, says HowtheMarketWorks.com. From a business standpoint, the Federal Reserve System, the value of the dollar, inflation, deflation and politics are all major factors that make stock prices fluctuate, reports StockMarketPrimer.com.
Fear and greed are two powerful emotions affecting the stock market, explains HowtheMarketWorks.com. Fear drives people to sell stocks too soon, and greed makes people hold out so long that stocks prices drop back down. The market is based more on perception than reality, states StockMarketPremier.com. Politics, wars, higher taxes, new laws and the mood of a country influence its stock prices.
The Federal Reserve System directly affects the stock market, says StockMarketPremer.com.
When the Fed raises or lowers interest rates, it affects stock and bond markets.
The StockMarketPremer.com also states that the value of the dollar affects stock prices. A strong dollar motivates foreign investors to buy American stocks, which boosts stock prices. On the other hand, a falling dollar has the opposite effect.
High inflation sends the stock market down because people cannot buy as much, according to StockMarketPremer.com. Conversely, low inflation enables people to buy more and drives the market up.
Deflation is the opposite of inflation; it occurs when money and credit are cut back. Prices go down, and supply goes up. However, most people can't afford to spend and the stock market drops, says StockMarketPremer.com.
The market is a game of supply and demand, StockMarketPremier.com elaborates. When a company is thriving, people buy its stock. Stock prices rise when buyers outnumber sellers, and stock prices drop when sellers outnumber buyers.