6 Factors Affecting Stock Volatility

Stock volatility is influenced by market sentiment, company earnings, economic indicators, interest rate changes, geopolitical events, and market liquidity.

For example,During the 2008 financial crisis, investor panic caused the S&P 500 to drop 38%; in 2020, Fed rate cuts spurred market recovery.

Market supply and demand

The rotation of the market in the sphere of supply and demand is the key to understanding how forces work out in the question of the stock price change. The supply and demand are the primary tools of the market operation on various levels including stock pricing and trading.

Supply of Stocks

Market players supply stocks as soon as certain factors, including IPOs, secondary offerings, and stock buybacks, act. When a company becomes public and releases newly issued stock, they conduct an initial public offering or IPO, thus increasing the supply. When Airbnb entered the public market in December 2020, millions of newly issued shares appeared on the market. After some period of time, companies continue issuing shares to the public, thus conducting secondary stock offerings. The action dilutes value of available stocks yet allows companies to accumulate more released funds. Stock buybacks, in turn, incur when companies purchase their own stocks, narrowing supply of that stock. This practice results in price appreciation because of the dearth of that stock on the market. Apple Inc. has been conducting massive stock buyouts, spending over 100 billion dollars on them within a few years, thus supporting the growth of its stock price.

Demand for Stocks

The demand for stocks occurs when certain forces come in contact with each other. The rising of the demand can follow such processes as investor interest, economic indicators, and company’s well-being. The former is heavily shifted by the market news and rumors regarding companies including growing or decreasing earnings and new investments. The new investment in a company and its products like electric vehicles led to the doubling of Tesla’s stock in 2020. The other two demands stem from economic context. The first implies that the rise of the country’s major economic indicators such as the GDP or decreases in joblessness rates or in interest rates bolsters investor confidence. The other results from companies’ good financial performance signaled by growing revenue values as well as profit appreciation over either a quarter of a year or longer periods of time.

  • Explain what determines the balance between supply and demand and hence the equilibrium price of a stock.

The concept of supply and demand determines the changes in stock price based on the equation, value= volume*price. Where supply refers to the volume of stock sold, while demand refers to the volume of stock bought within a trading time. The balance between the supply and demand of a stock determines the equilibrium price of the stock as the difference between the two points determine the price for a particular share. In this case, where the demand for the stock is high, relative to the supply leads to price increase and price decrease when the case is the opposite. For example, the COVID 19 season led to the high demand for technology stock as the most organization plied the remote work and digital services to manage their businesses. This led to the increase in stock price for Amazon and Zooms, while the price for travel services and hotel declined as there was no need for them at that time.

  • Outline the key external factors that can affect this balance, giving reasons for your choice, and give one example of each.

The key external factors that can affect the balance between supply and demand includes:

  • Government policy such as, tax changes, regulations, and fiscal stimulus. Example to illustrate this point especially in the COVID 19 time, the US government provided economic stimulus package to support the economy and address the unearth issues without inflation.

  • Global events such as, geopolitical risks, pandemics, natural lights. The example to illustrate this point, in 2022, Russia invaded Ukraine and due to the fear of world war 3, investments lost a lot of value in a flash as a sign of the next potential loss.

  • Technology development, new innovations or replacements. The best example to use on this point its the development in electric cars and replacing the engine vehicles.

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Interest rate changes

Stocks are significantly affected by interest rate changes since they influence the cost of borrowing, which in turn affects consumer spending and the overall economic activity. Investors who understand these relationships are better poised to navigate the stock market. Interest rates and borrowing costs When interest rates rise, borrowing becomes more expensive. This raises the cost of operations or expansion for companies that rely on one form of debt or another. For instance, when the Federal Reserve raises the interest rate from 0.5% to 1.5%, the annual cost for a company borrowing $1 million rises by $10,000. This extra cost affects businesses’ profit margins, resulting in lower stock prices. On the other hand, if the borrowing cost lowers, a company will be inclined to invest the money into its growth and expansion, which could ultimately lead to higher stock prices. For example, in 2020, the Federal Reserve made several rate cuts in response to the COVID-19 pandemic with the goal of reducing interest rates and increasing economic activity. As a result, the stock market rallied.

Interest rate changes and consumer spending

Interest rates also affect consumer spending. Increased interest rates raise home-loan payments and other loan payments, consequently reducing consumers’ disposable incomes. Reduced spending on non-essential commodities will affect retail and other consumer-dependent stock prices negatively. if interest rates are hiked by 1%, the monthly cost of a $300,000 mortgage increases by around $200. On the other hand, decreased interest rates lower the cost of borrowing and loan repayments for consumers, increasing their disposable income and inducing higher consumer spending and spending on non-essential items.

  • With regard to investment strategies, it is possible to state that investors frequently act in accordance with the changes of the current interest rates. In particular, when interest rates are increasing, the demand for bonds and other fixed-income investments raise. Consequently, the strategy of investment also changes since bonds become a preferable investment to stocks because of their higher rates. Consequently, stock prices tend to fall when interest rates increase. On the other hand, then interest rates are low, low returns of bonds make stocks more appealing and the price of stocks is increasing.

  • The alteration of interest rates inevitably affects the corporate earnings. For example, high interest rates should have a negative influence on companies which raise debts consistently. It happens because the increase of interest rate results in the increase of interest costs reducing income of the company. In fact, interest rates change and companies cannot predict it. However, let me provide an example to illustrate the influence. If a company has $500 million of debt at the interest rate of 3%. Thus, with the increase of the interest rate of 1%, the annual cost will raise by $5 million leaving a direct impact on the increase of the earnings. Lower interest rates work in the similar way but in the opposite direction as it raises revenues from investments of in bonds increasing net income and the price of stocks. For example, the decrease of interest rates in 2008 caused the reduction of the costs on the interests of the majority of companies which increased their profitability and consequently the increase of stock price.

Real-world Example

An example that illustrates the effect of changes in interest rates is the activity of the U.S. Federal Reserve in 2018 and 2019. In the former year, the institution increased these rates four times, which led to raised borrowing costs and a powerful correction in the stock market. Its S&P 500 index dropped to nearly 20% from the peak in September to the trough in December.

Economic Indicators

Economic indicators play an essential role in explaining stock market volatility. The majority of these indicators reflect the big picture of the national economy which, in turn, impacts investor behavior and stock prices. Campbella and Li pointed that the effect of an indicator on the stock prices can be either direct, where the indicator shows immediate effects on the stock prices, and indirect where the indicator creates an expectation of future change for the stock prices.

Gross Domestic Product (GDP)

GDP is perceived to be the most vital indicator of a country’s economy performance. It measures the whole output produced in a specific country. A rise in the GDP usually points to economic improvement and helps to boost both investor confidence and stock prices. According to Appelbaum, U.S. GDP expanded by 5.7% in 2021, the fastest pace since 1984. The healthy economic growth led to a positive stock market reaction: investors were anticipating increasing corporate profits.

Unemployment Rate

The unemployment rate is considered as the percentage of the labor force who cannot find a job and are actively seeking labor. A high unemployment rate shows an economy in depression that might trigger lower consumer spending and profit outcomes of corporations. In other words, it leads to depreciating stock prices. Thoma claims that during the Great Recession of 2008-2009, the unemployment rate in the USA rose until it has reached 10% pushing the stock prices down. Unlike this, the low unemployment rate shows that the market is flourishing which, in turn, helps stock prices up. In 2019 the unemployment rate decreased to 3.5% in the USA, which was reported as one of the lowest in 50 years, thus urging stock market growth.

Inflation Rate

Inflation measures the rate at which the general level of prices for goods and services is rising. Given that moderate inflation is a sign of a growing economy, seeing low or economic conditions is vital. Over the years, the U.S. has witnessed high inflation. For instance, the U.S. experienced double-digit inflation in the early 1980s. As a result, interest rates hiked and the stock market experienced fluctuations. However, the 2010s are some of the periods when the U.S. experienced low to moderate inflation, with an average of around 1.8% per year. Accordingly, the stock market reported positive performances due to stable purchasing power and continued low-interest rates. Interest Rates

Interest rates, as set by central banks, indicate a zero-economic period. Here’s why: Interest rates control the bank rates and individuals’ borrowing costs. An example of such a zero period is when COVID 19 paralyzed the U.S. economy. As such, the Federal Reserve reduced interest rates; in this case, almost to 0%. This move contributed to stabilizing the stock market, and the economy recovered within one year from the time the pandemic began. Consumer Confidence Index (CCI)

The Consumer Confidence Index measures the optimism level that consumers have concerning the economy’s general state and their personal financial state. Higher consumer confidence results in increased consumer spending. As such, corporate earnings increase, as does stock prices. In November 2021, the CCI stood at 10.5, which was a clear sign that the economy was recovering and that the stock prices were moving upwards.

Manufacturing Activity

Manufacturing activity is often described by the Purchasing Managers’ Index . While PMI above 50 means that the manufacturing is expanding, anything below 50 indicates contraction of the sector. Rapid manufacturing activity indicates growth in the economy and can contribute to increased stock prices. For example, in June 2021, the U.S. PMI reached 60.6, indicating that the manufacturing activity in the state was doing well . As a result, the market mood was positive, and stock prices were going up.

Stock prices are triggered by economic indicators. For example, in the beginning of 2020, as COVID-19 started to spread, the GDP was down, and the consumers were losing confidence in the economy. The stock prices followed and took a deep plunge. In a matter of weeks, between February 19 and March 23, the S&P Index 500 has fallen by over 30% . However, as the economy started to recover in 2021, increasing GDP and consumer confidence, the stocks followed suit. In 2021, the S&P Index 500 grew by about 27%.

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Investor Sentiment

Investor sentiment is one of the most significant factors that determine stock price fluctuations. It reflects the overall attitude of investors to market or a certain stock. Moreover, sentiment affects whether they buy or sell, playing a pivotal role in stock price movements.

News and Media Influence

One of the most influential factors is the news and media. If a company issued a good report, had a breakthrough product launch, or gained a beneficial regulatory decision, it may help grow investor confidence and up stock prices. For example, in January 2022, Apple announced that its revenue hit all-time quarterly records. Its stock prices grew by over 7%, exceeding $650 per share. In the same way, bad reports, scandals, lawsuits, and poor earnings may have an opposite effect, shaking investor confidence and dropping stock prices. For instance, in September 2018, Facebook lost almost 20% of its stock prices in one day, after it had been reported that millions of users’ profiles had been tampered due a major security breach.

Market Trends and Technical Analysis

Another factor that affects investor sentiment is the market trend and technical analysis. Traders often perceive the market through charts and technical indicators. When signals show positive patterns, such as moving averages crossing halfway or strong statement levels, investors are more likely to buy, which creates positive sentiment. For instance, in 2020, Tesla experienced a large rally, because technicals made positive signals for retail and later institutional investors. On the other hand, when signals show bearish patterns, it leads to negative sentiment and sells pressure, because of which the price falls.

Some of the factors that can shape investors sentiments include:

  • Social media and online forums: presently, social media platforms and online forums have become instrumental in influencing investor sentiment. Some of the prominent media include Twitter, Reddit, and StockTwits. On such platforms, investor share information, attitude, and even strategies on specific stocks, often leading to rapid changes in sentiment. The GameStop short squeeze in January 2021 offers a perfect example. Coordinated by retail investors on Reddit’s WallStreetBets forum, sentiment towards GameStop was primarily positive, leading to more than 1750% increase in the stock price from about $20 to nearly $350 in a matter of a week. The surge occurred without any specific news or announcements but rather driven by the sentiment of the investors causing a frenzied buying. Employments reports and forecast are among the crucial factors influencing investors’ sentiment.

  • Economic events and policy changes: the announcement of significant economic events and policy changes, such as interest rate adjustments, government spending, and fiscal policy revisions, often trigger fear or optimism among the investors. For instance, the announcement of COVID-19 vaccine approvals towards the end of 2020 generated heightened optimism among the investors leading to a surge in the stock market. Conversely, equities in Europe were largely negative and quite volatile in 2019, coincided with BREXIT uncertainty. The sentiment was mainly negative, and there were reports that large companies were considering relocating their headquarters to other regions. However, the primary effect was witnessed in many investors starting to disinvest in Europe.

  • Employments reports and forecast: in cases where most of the companies have their reports is above the expectations or believe, it is often anticipated that positive sentiments will be observed. For example, in October 2021, Netflix gained about 10% increase in the prices of its stock. The performances of the company’s subscribers and earnings estimates of analysts have been exceeded. However, there can be adjustment where the performances of some of the companies or data indicate below the estimated expectations]):

  • In late payment of implementation of their strict requirements, some of them may face a drop in their prices in stock. For instance, in February 2022, after it was indicated that the daily active users would drop, the Meta Platforms prices of its stocks dropped by about 25%. It was the same day when the revenue estimates were also below what had been forecast.

Behavioral Finance and Psychological Factors

Behavioral finance is a field that studies how the psychological factors of investors influence their behavior and sentiment. Human emotions such as fear, greed, and overconfidence may lead to irrational investment decisions. For example, during market bubbles people are extremely over-optimistic and greedy. They believe that the stock prices will grow by 10% every month without any logical explanation. Consequently, the prices of stocks rise far above the intrinsic value of companies. The dot-com bubble is a perfect example of such crazes. In the late 1990s, tech stocks showed incredible growth only because the investors were greedy and overconfident. They made people spend the last dime to buy the overvalued stocks. At some market points, several stocks were sold for $1000 which never even existed or at least prepared to produce the profit promised. The next example is a market crash. During such periods, people feel either extreme fear or even panic. In this case, they begin rapidly selling their stocks aggravating the drop in the stock prices. The latest example is the stock market collapse of 2008. People were extremely afraid to lose the jobs and capital. Therefore, they started to sell their stocks as soon as possible. As a result, the S&P 500 index fell by almost half producing maximum plunge in March 2009.

Geopolitical Events

Geopolitical events have significant effects on the movements of stock markets since they can have both positive and negative consequences, depending on the situation. These events may have ramifications across a wide range of time and may include investor sentiment, economic stability, and global trade relations. Geopolitical events will raise the risk of investing and the risk of holding a financial instrument, and as indicated by Kadoya, Willinger, and Ziemba, there have been several international conflicts, as well as terrorist attacks. These events may have an immediate impact on the volatility of stock markets and may lead to a sharp reversal. The biggest geopolitical events that can influence market risk are wars and conflicts and terrorist attacks. Wars and fighting are major geopolitical activities that are frequently associated with ill and severe stock market swings. Because armed struggle creates doubt about the economy’s stability, investors are more inclined to become more informed stock traders. For instance, the Gulf war in 1990 caused a 3% decline in world stock markets; when there was a threat of disrupted oil supplies and global economic mayhem, the S & P500 saw an even sharper decline of 10% over a few weeks. In many nations across the continent, the Russian invasion of Ukraine in 2022 caused devastating declines in equity markets, including an 8.1% decline in the Euro Stoxx 50 in a single day as a result of the diminished supply of power and economic sanctions.

Political Instabilidade

Pultical instability, such as coups, revolutions, and government collapses, cause high stock market volatility. Investors are scared because many political situations can lead to economic mismanagement, changes in regulations, and disruptions on how widespread corporate businesses operate. The 2016 Brexit referendum in which the United Kindom was separated from the European union sent an immediate wave of shock in the financial markets. The British pound dropped to its lowest level in 31 years, and the ftse 100 index declined by more than 3%, which shows how investors were worried about the economic impacts of brexit.

Trade wars and sanctions

Trade wars and sanctions tend to mess up global trade patterns that disrupt the amount of corporate earnings on the market. Tariffs and treds of imposing high taxes on commodities and goods that are being old in foreign markets tend to increase costs of production and general goods’ costs. Since goods are being sold at a higher price, it would be difficult for consumers to buy these commodities and corporate businesses will tend to make less profit Trading wars between the United States and China started in 2018 and have since increased tvesion making the global stock markets to be very volatile. President Donald Tremendous has imposed trade tariffs in hundreds of billions of goods in china which hast increased volatility with s$P 500 making its first declines in the year in August through multiple stock exchanges. The stock market was volatile because the investors are worried about the world’s supplies and growth.

Diplomatic Relation

Findings of better diplomatic relation are that countries tend to trade together and even provide mutual benefits. If two governments are turning a bit volatile to each other, them their negotiations make the influences partners lost hope of making exchanges. However, countries quality of diplomatic relations are dependent on how business are being made or political traders in other word if the business is much the top politicians will try solving the trade. In 2014 there where better diplomati9c relations between the United States and Cuba. Berger shares in herzfeld carribbean basin went up by 30% because the cubupan market requires eral of americas.ippolitics The Obama administration starting easing restrictions and soon cuban relations law was signed. On the other hand, in 2020, United States and Iran have raised tensions due to the killing of Iranian general shortage Soleimani that has significantly raised global fall prices.

Title: The Impact of Geopolitical Events

Geopolitical events can result in regulatory changes and policy shifts that could affect businesses and markets. These include changes in trade policy, environmental regulations, and financial regulations that create new risks and opportunities for companies. Real-world examples of the impact of geopolitical events include the COVID-19 pandemic. This paper will consider the real-world examples of the impact of geopolitical events and conduct an analysis of the given datasets.

To illustrate the impact of the geopolitical event, consider the COVID-19 pandemic and its geopolitical implications leading to the collapse of the global economy. The consequence of the COVID-19 pandemic has been the lockdowns that started in most countries of the world. This includes the disruptions of the global supply chain and the unprecedented response of the governments to death. The realization that the COVID-19 pandemic was lethal led to a collapse of the global stock and housing markets, which became visible by February 2020. The S&P 500 collapsed by more than 30% in March 2020.

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Industry updates and news

Industry updates and news are important drivers of change in stock prices. They provide an understanding of the state and dynamics of development of specific sectors, influencing not only investors’ decisions but also the performance of securities.

Reports of Earnings and Financial Indicators

One of the main indicators of changing the cost of securities is their financial indicators and reports on earnings. This information is published every quarter, providing detailed information on the revenue, profit, and future prospects of development. Thus, when in Q4 2020, Amazon reported its earnings, and this time, the Internet giant demonstrated a change in revenue at the level of 44% to $125.6 billion and net income at the level of $7.2 billion, after-hours quotations added more than 3%. Conversely, if an issuer has not coped with the task and its earnings are significantly worse than predicted, capitalization decreases. In one day, paper of Meta Platforms fell in value by more than a quarter of the previous price, having lost 26% in February 2022 after the announcement by the owner of Facebook and Instagram of weaker-than-expected earnings and user growth.

Innovation activities

New products and market novelties can also change the direction of movement of a security price. The release of a new product is a powerful driver of growth; if a certain innovation is implemented, in the coming years, it is possible to lengthen the company’s operating life and improve the market position and profitability. For example, in 2020, Apple’s stock price was positively affected by announcements and the presentation of the iPhone 12 with 5G support. Moreover, the publishing of information about the appearance of new technologies and their potential application in various industries, for instance, artificial intelligence and electric vehicles, also contributes to the outbreak of stock prices. One of the main reasons for the growth of quotations for securities Tesla is the automaker’s development of new models and the improvement of autopilot technology.

Mergers and Acquisitions

Mergers and acquisitions often result in large movements in stock prices. The announcements of the M&A deals may indicate the growth prospects, opportunities to expand in the markets, or synergies that may increase profitability. For example, in December 2020, when CRM disclosed acquiring WORK for $27.7bn, the stock price of Slack skyrocketed by 48%, illustrating that investors believe in combined prospects:[10] “Slack’s stock surge production brief.” MarketWatch. The deals, however, may be regarded as overpriced or too risky, and the stock values may go down, as well. When in 2015 Pfizer disclosed its plans to merge with Allergan for $160bn, the market reacted with a decline. The deal was not only the biggest in the industry’s history but was also the most complex. The latter part did not sit well with the investors who were unclear how the companies have calculated their combined earnings and how the new “conglomerate” may be maintained. Government Policies/Regulatory Changes

Government policies and regulations may have substantial effects on industries and stock prices. As different rules may make it harder or easier to do business, the stock prices may reflect these perspectives. In 2018, Canada legalized cannabis, and the marijuana industry boomed with companies similar to Canopy Growth observing stock value spikes. Other industries get more scrutiny from the regulators. For example, in July 2019, the U.S. Department of Justice announced a large-scope antitrust probe of major tech companies. The anticipation of the legal challenges has led to a stock price decline, with Amazon, Facebook, and Google experiencing large fluctuations.

Sector-specific News

Industry-related news might impact stock within the specific sector. For instance, news related to a shortage of raw materials as a result of environmental disasters or continued supply chain disruptions would lower the production of finished goods. A good illustration of how industry updates can influence stock is the information about abandoned projects in the oil industry that affected the demographic of skilled professionals. As a result, the stock of the involved companies might drop as production slows down. On the contrary, if a particular industry is to grow in compliance with global development priorities, stock will increase, reflecting these expectations.

Market Trends and Analyst Ratings

Regarding trends and ratings, they have to do with market performance. If stock is likely to increase, investors are encouraged to keep it, which might improve estimations of individual stocks as lucrative assets. Nevertheless, such a pattern might also be seen from an inverse perspective. Market trends can deteriorate confidence among customers looking to sell stock and invest in more stable assets. As one notable example, analysts released increasingly positive reviews of Nvidia in 2021, boosting the expectations that the stock would grow. The reason included strong growth followed by demand for gaming and data center units. On the other hand, many other sector-related stocks might start to decline in response to industry news.\Unit VIII: Global Financial Markets

To illustrate how updates can affect stocks, one can consider some real-life examples. For instance, one might review the stock change among. Similar changes in Moderna stock are numerous throughout 2020 and 2021. In November 2020, after the company announced the vaccine’s efficacy, the price instantly went up by over 20%. The changes in Moderna stock throughout 2021 are commensurate with these numbers.

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