by Pauline

Created on: March 17, 2009

In a world becoming increasingly dependent on the past and present performance of stock markets all over the world, it is crucial for an average man or woman to understand the basic concepts driving the financial markets. We look at the levels of the NASDAQ or Dow Jones Industrial Average for signs that this economic recession is about to end. As such, it is important to know the factors that drive the rise and fall of share prices of listed companies in the stock market.

The basic economic concepts of demand and supply remain at the heart and center of stock markets. A person wanting to buy shares in a company can do so at a specific price. If there are more people wanting to buy shares of that company, this increase in demand drives the share prices up, since there is a limited amount or supply of the stock. Once demand for the shares drop, the number of available shares on the market rise, causing a downward pressure on the share price. There are a number of internal and external factors that can influence the demand and supply of shares of a company.

Among the internal factors is the attractiveness of the company itself. A listed company with consistent returns, excellent management team and attractive growth prospects should be able to attract investors, thus fueling demand for its shares. Company news and announcements also have an impact on its share prices. An announcement that its quarterly profits doubled could send the share price sky-rocketing, but news that a company's CEO is involved in a massive scam results in share prices spiraling down. Similarly, the performance of the overall sector that company is in could have a direct effect on share prices. An example of which is the retail sector, which is currently taking a beating due to a slump in consumer expenditure, thus creating a snowball effect on most retail companies.

Share prices could also be affected by economic trends, as employment data, GDP and inflation could have direct impact on stock markets, indirectly hurting the underlying listed companies. Also, globalization has created an intertwined network of stock markets, wherein the performance of major markets overseas could have an impact on local stock markets. Global stock markets look to the performance of Wall Street as an indicator of how well their respective markets would perform for that day. Geo-political events, such as the terrorist attacks on New York City and nuclear disarmament talks overseas could also cause share markets across the world to move up or down.

These and a host of other factors have a direct influence on global stock markets. Thus, it becomes crucial to be aware of economic and political events happening throughout the globe. Due to ongoing economic upheaval causing stock markets to behave in an erratic and volatile manner, investors need to be aware and be proactive in order to preserve their wealth. No economist or financial analyst would be able to predict the direction the stock markets would take with certainty, but knowing the factors that may have a direct impact on share prices could help inspire calm in a financial world wreaked with havoc and chaos.

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