Five Factors Which Affect The Stock Market

The stock market can be volatile, this is typically described as a Beta, and the reasons behind such falls can be complex. Typically stock prices are affected by a number of factors but large shifts in price come down to five specific factors.

Famous fund manager and author of One up on wall street, Peter Lynch, has described “there is a company behind every stock and a reason why companies – and their stocks – perform the way they do.”

Stocks move up and down constantly throughout the day but when it comes to whole markets, there are typically five major Factors Which Affect The Stock Market.

Internal Developments Within Companies

Internal developments within companies can happen at any time and can be numerous which can both positively or negatively affect the stock price depending on how the market views the action.

Activities such as mergers, acquisitions, and earnings reports are common for companies, especially as companies have to report earnings yearly. Earnings can positively or negatively affect the share price depending on whether they beat, meet or miss predictions as well as if they give good future guidance or bad.

Other company actions as dividend raises, cuts of suspensions can affect the stock price as dividends are viewed as a return of value to a shareholder.


The development or approval of new or innovative products can affect a stock positively as well as hiring or firing of leading managers or CEOs.

Stock movements will be the most volatile when any of these internal developments are unexpected.

World Events

World events can have multiple ways of affecting a stocks share price, like usual bad news means the market goes down and good news the market goes up. World events can affect the market in multiple ways such as if there is a natural disaster or terrorist attack which locks down air traffic or boating the result could affect certain companies logistics. Depending how long these events go on for could affect a companies bottom line and earnings.

Additionally the news of war can affect stocks in different ways. For example the most recent war, between Russia and Ukraine meant many companies pulled out of Russia, while other stocks got sanctioned, negatively affecting the stock price.

On the other hand, defence companies stand to gain from wars and would more than likely increase in price, even though they are considered Sin or Vice stocks.

Interest rates

Rising or falling interest rates not only affect investors but also companies.

With rising interest rates investors have more of an incentive to save for the short term where savings accounts naturally come with a lower risk tolerance than investing but offer rising yields on savings. Drawing the gap between possible market returns and returns on cash.

Additionally investors may wish to exit their higher risk investments and instead investing into bonds, normally government backed securities such as Gilts, i-bonds or CDs.

When interest rates rise these can impact companies which have a large amount of debt, which maybe coming to the end of contract and need to be refinanced. Additionally REITs such as mortgage REITs can be negatively affected by rising interest rates as higher rates mean that the NAV of a mortgage REIT will decline and often take the share price with it.

Social Investing

The stock market runs on fear and greed, which can be tracked via CNN Fear & Greed Index.


When the market is fearful, it typically indicated that the stock market is volatile and is more of a sellers market. Where when in greed it is a buyers market, associated with rising stock prices.

This doesn’t indicate whether the overall market is a good buy or a sell but investors sentiment towards the overall market.

Additionally to this we have been seeing a ever increasing social investing market. Where it used to be a big boys game, where hedge funds and the such can move stocks and the overall market, we are seeing normal investors come together to affect stock prices.

A sub Reddit called r/wallstreetbets, which has 12.6 million subs, managed to affect the stock Gamestop ($GME) in January 2021. Their aim was to short squeeze the American video game retailer.

Approximately 140 percent of the stocks public float had been sold short. The retail investors of the subreddit took action to pump money into the stock, raising the price, making short sellers cover their positions and resulted in an additional pump to the share price.

By January 2021 Melvin Capital, which heavily shorted GME lost 30 percent of its value at the start of 2021 and by the end of January suffered a loss of 53 percent.

Impact of Exchange Rates

Fluctuating exchange rates have a direct impact the price and value of stocks in foreign countries.

Changing exchange rates can affect stocks in multiple ways, specifically:

  • Earnings – If they export or import from other countries the FX rate can affect incomes and earnings of companies.
  • Cost to you – The changing FX rate can make buying a company more or less expensive even if the share price stays the same.
  • Position value – With stocks in foreign denomination, the FX rate can affect the gain or loss of your position.
  • Dividends – As the FX changes this can mean you may receive more or less dividends.

A changing foreign exchange rate, over the long term, can affect your positions in 3 main ways so is something to keep in mind. While diversifying a portfolio into different markets its good to keep in mind how the FX rate may affect your positions long term performance.

Factors Which Affect The Stock Market

Each of these four factors can drastically affect a company and overall stock market over the long term. Which is why its key to make sure you know what your investments are doing.

Individual stock investing takes the most time as these 4 factors which affect the stock market can directly affect a stocks price. Compared to ETF investing, which is much simpler where world events will have the largest impact over the long term.

This does not mean you wont have to be vigilant as even with ETFs exchange rates can affect returns. For example investing in the the S&P500 from outside the US carries the FX affect as the companies would be priced in Dollars and if its a distribution ETF the income received would be converted from Dollars to the denomination of the ETF.

If you are unsure about what the stock market is, check out our article about the stock market. Where you can learn exactly what the term “stock market” means.

What is the Stock Market


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