The 3 Factors That Influence Stock Market Volatility

Author: George Davis

The stock market can be incredibly volatile based on numerous factors. We share the three factors that influence stock market volatility right here.

The stock market is incredibly complex, making it incredibly difficult to identify factors that influence volatility in the market. It is a combination of investors making uncoordinated decisions related to various investments as a whole. Even though the stock market can be volatile, investors can benefit from it if they learn to harness it correctly when making investments.

There are basic economic principles that govern the volatility in the market, and we will look at some of them in detail here. Market experts have identified three factors that influence stock market volatility, and these are as follows:

1. Supply and Demand

In any market, the price movement is determined by the supply and demand between providers and consumers. That's why most economists say that market equilibrium is achieved when supply equals demand. That's true when investing in stocks because supply is the number of shares people sell, and demand is the number of shares people want to buy.

If the number of buyers exceeds the number of sellers, the price of the stock will increase. On the other hand, if there are more sellers than buyers, the price will drop.

2. Investor Confidence

Confidence plays a major role when investing in the stock market as investors are more likely to invest in stocks if they are convinced that their shares will increase in value. If they believe that their shares will perform poorly, more investors will be willing to sell in the market. Some events that may affect the confidence of investors are:

• Natural disasters
• Technological changes
• Wars or other conflicts
• Concerns over inflation
• Government monetary or fiscal policy

For instance, the COVID-19 pandemic created more uncertainty about the stock market's future, which caused most investors to sell their stocks. Therefore, there were more sellers than buyers.

3. Interest Rates

Interest rates are believed to play a significant role when it comes to influencing stock market volatility. There are several reasons why that is the case because interest rates affect how much banks, investors, governments, and businesses are willing to borrow. That has an impact on how much money is spent in the market. When interest rates rise, some investments like U.S. Treasuries are safer and more attractive alternatives to investing in stocks.

As an investor, you need to look at all the factors influencing volatility in the stock market before you invest in it. That could be the difference between a positive or a negative return on your investment. Even though the stock market could be volatile, there are some cases when you can use this volatility to your advantage as an investor.

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