Explanation Strategies for Today's Volatile Stock Market for General Public
The stock market, a dynamic and ever-changing landscape, has been a subject of interest for many individuals and institutions. It's a place where the fortunes of businesses big and small are decided, and where investors seek to grow their wealth.
A fundamental truth about the stock market is the existence of winners and losers. This split is historically consistent, reflecting the ebb and flow of economic conditions and investor sentiment.
One factor that can influence this dynamic is interest rates. When central banks, such as the Federal Reserve or Norway’s Norges Bank, lower interest rates to stimulate growth, as they did during the Great Recession and more recently during the COVID-19 pandemic, low interest rates can make bonds less attractive. As a result, investors may shift their funds to the stock market, driving up stock prices.
Each index, like the S&P 500, Dow Jones Industrial Average, Nasdaq, or Russell 2000, is a collection of selected stocks, given weights based on market size. However, it's important to note that these indices do not represent the overall performance of stocks. For instance, the top 10 weighted stocks in the S&P 500, including tech giants like Amazon, Apple, Microsoft, and Google, comprise more than 20% of the entire index's value. Conversely, the other 39% of shares in the S&P 500 were down for the year in 2020, with the biggest drop being 121.5%.
The stock market's performance in 2020 has been unpredictable, much like attempting to foretell which shares will gain the most in percentage. However, when interest rates stay low and investors are not excessively worried about economic conditions, stock prices are likely to keep climbing.
Investors primarily focus on the future value of a company when buying stocks. They measure their portion of corporate profits through earnings. As of the week ending September 25, 2020, the stock prices of about 61% of the S&P 500 were up a positive percentage, ranging from virtually unchanged to 76%.
Central banks' decisions are more influential on markets than major politicians' actions. The low interest rates set by central banks, such as Norges Bank's 0.00% policy rate in May 2020, generally support stock markets by lowering borrowing costs and encouraging investment and spending.
Moreover, when interest rates are low, there are limited alternative investment options. This increased demand for stocks can further drive up stock prices.
For younger companies, especially in tech, growth is a key factor. Future losses may not matter for some companies if the customer base and revenues continue to rise.
In conclusion, the stock market is a complex system influenced by a myriad of factors, from central bank decisions to investor sentiment. Understanding these dynamics can help individuals make informed decisions when investing in the stock market.
Read also:
- Trade Disputes Escalate: Trump Imposes Tariffs, India Retaliates; threatened boycott ranges from McDonald's, Coca-Cola to iPhones
- Aquatech purchases Koch's Direct Lithium Extraction business, merging Li-ProTM DLE technology into the PEARLTM Technology Platform.
- Nepal's Journey: Evolution from Street Life to Political Power
- Li Auto faces scrutiny after crash test involving i8 model and a truck manufacturer sparks controversy
