Interest Rates

When the Federal Reserve decides to raise interest rates, consumers delay their purchases and start to save money due to the increased cost to purchase items. As a result, a business makes less profit. When investors notice decreased business earnings, investors sell stocks and stock prices fall. Similarly, when the Federal Reserve decides to lower interest rates, consumers often decide to spend because of the decreased cost to purchase items. When consumers spend, businesses see an increase in profit. As investors notice the increase in business earnings, they start to invest in the stock market, which increases the demand for stock and stock prices rise.

Earnings

When the economy shows signs of declining, a business’s earnings decrease. With decreased earnings, businesses may choose not to pay the amount of dividends that were paid in previous years. For investors, this means that they earn less income and it serves to discourage investors from investing in stocks. In addition, investors currently invested in stocks may choose to sell as they discover other investment vehicles that will provide more income. As the demand for stocks decrease, stock prices fall.

Labor Market

When a company cuts its work force, this initially has a positive effect on stock prices. Fewer employees means the company has increased profits as it pays less in salaries and benefits. When investors notice increased earnings for a particular company, they may choose to purchase the stock, which increases demand and stock prices rise. However, an investor should note the reason that a company has decreased its work force. If the company is having trouble finding new business, then the reduction in the company’s work force is a warning sign to investors. If investors notice this, they will pull their money out of the company and the stock price will fall.

Risk Tolerance

References

Canadian Securities Course: Volume One; CSI Global Education Inc.; 2008 Stock Price Factors Marie Zukowski; Professor; Seneca College, Toronto, Ontario

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