There are five factors which played vital role in Stock Market:
- Political
- Economical
- Sentimental
- Fundamental
- Technical
Political factor is the most important factor while choosing to select in which stock exchange(Like Karachi Stock Exchange, New York Stock Exchange, Bombay Stock Exchange…) you should invest. It depends on the country situation, political environment and government policy regarding infrastructure development, education, health etc…If there is political stability then it will give a good impact on investor’s preferences.
Political factor does not mean the democratic system, it include all the things which affect the country situation like peace in the country, environment-friendly laws for investors, security issues, taxation policy, restrictions on trade, etc… We have an example of Benazir Bhutto who assassinated at a public rally in Rawalpindi on 27th December 2007 which effect Pakistani stock market badly along others world stock markets.
Sentimental factor asks with individual how much risk you can take??? Are you risk averse or risk taker.If you are thinking to invest for a long term and you are risk averse then you should invest in blue chips companies which are fundamentally strong and technically sound. But, if you are a risk taker and you want to play the stock game for a short span of time like interested in daily or weekly trading, then you may go on those stock where speculation took place. Sentimental factor only describes how much risk, an investor can take.As sentimental factor neglect the fundamental fact of economics that stock market moves up and down on the basis of demand and supply , it interpreted it as that stock market move upward direction on the basis of greed and move downward direction on the basis of fear, so we concluded that the movement of stock prices are not only dependent on demand and supply there is also important role of greed and fear of individual or institutional investors.Sentiments are the part of human psychology and this factor is related to behavioral finance.
Economic factor, one of the important factor which affects stock market in a positive or negative way.Let’s see how it can be but first, look what economic factors are: interest rate, inflation rate, exchange rate, GDP rate etc.. Interest rate set by the central bank of the country like in Pakistan State bank of Pakistan has an authority to increase or decrease interest rate in its monitory policy. If interest rate increase it gave bad impact on the stock market and vice versa. Similarly, some analyst says that, if Gold is moving up then the stock market will react in an opposite direction.
High Inflation rate, decreases your real interest rate and sometimes you are getting it in a negative number.
Real Interest rate = Nominal Interest rate – Inflation
If the nominal interest rate is lower than inflation, it’s mean that you are getting negative returns, so while investing you have the only goal that you will get more money tomorrow as today you have.
If a country is a developing then there are more chances of higher economic activity as compared to a developed nation. So when economic activity will increase it will generate more sales and increase companies revenues and profits. It will give a positive impact on the market. If we just look at one sector, it will also get boom while other sectors are moving in red numbers. How? we have an example of Cement sector in 2005 when Earthquake create massive destruction in upper part of Pakistan. After that, large reconstruction had been started and the demand for cement and the material used in construction boost up. So, it developed a positive impact on cement industries in Pakistan.
Similarly in the era of Musharraf, when our Karachi stock exchange was on a boom. Financial Institutions and Brokerage house were generating a hell of profits, we have an example of Jahangir Siddiqui share prices was touching to Rs.1,200 then after a great fall now standing at its 100 times lower price.
Fundamental Factor, play the most important role while you are selecting in which stock you should invest. Is it fundamentally strong or weak? The answer to this question, you come to know when you do fundamental analysis of that stock. Starting fundamental analysis through companies financial statements like balance sheet and income statement. Check the accounting equation( Assets = Liabilities + Owner’s Equity ), it tells you about the financial position of the company. How many assets they acquired and debt to repay. After a complete analysis of balance sheet then check to its income statement. It’s also called profit and loss statement, tells you the company is in profit /loss.
Financial ratios are also helped us like P/E ratios tell us that how much $we are paying to get a profit $1. While these two are quantitative factors(Financial Statements & Financial Ratios). We can also check their qualitative factors like Competition, Regulations, Industry Growth , Market Share etc…
Technical Analysis, tells at which price we should buy the stock. For this purpose, we need to do a technical analysis of that stock.
While choosing stock, I check first its RSI( Relative Strength Index ) indicator. It’s a number between 0-100. If it’s 30 or below it’s mean the stock is undervalued or oversold so there are more chances to come back to its intrinsic value while if it’s around 70 or above its mean stock is overbought and overvalued and more chances to pull back. So we can develop an assumption that when the stock is around 30 we should buy it and if it’s on the level of 70 we should sell it asap.
It’s only one indicator which tells us at which position we should buy/sell the stocks. There are a number of technical graphs and tools which help us in taking decisions.
E.g
- Average directional index – a widely used indicator of trend strength
- Commodity Channel Index – identifies cyclical trends
- MACD – moving average convergence/divergence
- Momentum
- Relative Vigor Index
- Stochastic oscillator
- Trix
We also used Graphs and charts. The most common are Candlestick chart , Line chart ,Open-high-low-close chart and Point and figure chart.