Investments in the secondary market are always exposed to risk. The factors influencing the stock price are many. The risk factors that influence stock prices arise from inside the stock market as well as from outside. Surprisingly, many of these risk factors also help in stabilizing the stock price when the environment is conducive to investment.
Every stock market investor knows that stock market investment is subjected to risk. The risk increases if the investment time horizon is short.
We will discuss the top short-term threats that may affect investment performance. This will include both inner risks and outside threats. These risks can be localized involving a particular stock or global mostly driven by outside influences.
We define these threats as risks. Henceforth we will call them risks. We have picked up these risks faced by the investors in the Indian market. Let’s get to the risks and understand them.
1. Budget and other Annual events
Government policies affect the performance of a stock. During the budget, the government declares the budgetary income and expenditure for the next fiscal. The government also declares some policies. Financial analysts show how their outcome is going to affect the industries as a whole, individually and on export and import. Some industries get benefitted from some policies while others do not.
The expectation and apprehension before the budget make the price movement erratic and create high volatility. Also, we can find many rumors labeled as news from government sources making rounds that affect price fluctuation.
And at times, some companies get badly affected by a hike in import duty on some materials which directly affects their balance sheet. Hence, after the budget, their stock prices come down sharply.
Thus, we can see the budget affects many companies. The stock prices of those companies change, either up or down distinctively.
This is one principal factor that affects stock prices in the short term annually. After the budget fever is over, many of the stocks go back to their pre-budget price levels.
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2. Fed Rate Hike
The US market affects most of the global indices. Due to recent global price inflation and global business scenario, we are seeing the Fed rate stability broken. When the US Federal Bank changes its interest rate, it affects the US dollar.
We know that the internal money market is mostly governed by the US Dollar. When the Dollar price changes, it changes the money exchange rate. That in turn affects the price of INR in respect of the Dollar. Therefore, if the Dollar price increase, every company that is involved in the import of raw materials get affected and their stock price comes down. On the other hand, companies that are earning from the export of finished materials or the IT companies’ earning potential increase, and their stock price rise eventually.
This is another factor that influences stock price in short term.
3. Commodity Price
Commodity prices change from time to time. These price changes occur due to many reasons. But basically, the supply and demand chain is the driving force that affects commodity prices. When the supply-demand chain maintains equilibrium, the price remains more or less static.
But when the commodity prices change, it affects many stocks. One important exchange on commodities is the LME, the London Metal Exchange which declares the international metal rates. A hike in steel, copper, and other metals affects industries in many ways. The effect of commodity price hikes in the international commodity directly affects the price of shares of many companies.
Recently, the war between Ukraine and Russia has badly affected many commodities. Two of them are Wheat and Sunflower. Though they are food grains, they are considered commodities because these are tradable in the international market. The sudden drop in wheat production created a big gap in demand and supply, which in turn increased sharp hikes in prices of them. Industries using these as raw materials for their finished products got affected and their share prices dropped for a while.
There are many commodities whose prices directly affect the production of many companies and therefore the company balance. A commodity price hike negatively affects the related companies’ balance sheets and directly affects their stock prices.
4. Fuel Price
The international Fuel price directly affects our economy, the Indian economy. Our economy is a largely fuel import-based economy. A big share of our budgetary expenditure goes towards giving subsidies to Indian citizens who are using fuel or fuel-based products. Though recent governmental policies have transferred the direct burden of fuel price hikes to the customers who are buying petrol and diesel, there is still a huge consumption of diesel led by Railways, Defence, and other governmental sectors.
Hence, the recent fuel price hike has badly affected the Indian economy by creating an increase in fiscal deficit and fuelling wholesale and retail inflation. This in turn dictated the budget for this fiscal.
The fuel price hike negatively impacts the share prices of many companies. Though this factor has global implications, international fuel price hike badly affects the Indian economy and share prices of many companies go down sharply.
5. US Dollar
We already discussed that the US Dollar governs the international market. Rise or fall in US Dollar price directly affects the INR US exchanges rate and directly affects the P/L of a company. So, we can see the short-term effect of the US Dollar on Indian stock prices.
In addition, the Japanese Yen also affects the stock prices of Maruti Suzuki and some other companies. Because these companies directly deal in Yen with them.
Similarly. the Sterling Pound, Russian Rouble, German Deutschmark, and Euro are some of the international currencies which are directly used by business houses of India, and fluctuations in their exchange rate affect stock prices.
6. FII Investment Risk
FIIs are very much active in our stock market. FIIs investment is one of the main driving forces of our stock market. They are big investors and their action creates a ripple effect in our market. When the FIIs take money out from the Indian market, it causes a fall and a rise in FII investment leads to a rally in the stock market.
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7. Inflation and Interest Risk
Inflation rate change in the Indian market creates changes in RBI policy. That creates a short-term effect on the stock market.
8. Profit Booking
Profit booking by institutions and FIIs creates a short-term fall in stock. It increases when the business environment is unstable or the market reaches a short-term top.
9. The Risk from Unprecedented Events like War
War-like events that are unprecedented give a sudden jolt to the stock market and often knee-jerk reactions can be seen. This creates a sudden fall in the stock market. The tenure of such a fall depends on many factors. Our market has already absorbed the effects of the recent Ukraine-Russia war.
10. Pandemic Risk
The Pandemic has shown how severe effects it can have on the global business environment. Though the markets are recovering from the effect, it took almost two years to subside. In the future, we may find similar events in future. But such occurrences happen once in a blue moon. It is hard to remain prepared for such events.
We have tried to mention some short-term effects that influence the price of stocks or the stock market as a whole. Some of these factors are applicable only to the Indian market and some have global effects. All in all, an investor in the stock market should be aware of these risks and also keep in mind that these are short-term threats. A long-term or a medium-term investor can absorb these effects very shortly.
I am Rohit Srivastava, Founder of IndiaCharts, and I have more than 18 years of experience working at Sharekhan as a Fund manager. In Dec 2019, I Launched the Indiacharts Mentorship Program, the most comprehensive Learning experience for Serious and Passionate traders/investors wanting to get the A-Z of what I call ‘Complete Market Analysis’ in one place in a rigorous three-month experience.
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