The primary factor driving security prices is investor demand. If the demand of securities is more than the supply (buyers are more than the sellers), prices of securities increase. On the other hand if the demand of securities is less than the supply (buyers are less than the sellers), prices of securities decrease. Demand is proportional to four factors: earnings, economy, expectations and emotion. Stock prices usually rise when all four factors are positive and fall when all four are negative. Stock prices are volatile because these factors change frequently.
Other factors affecting price of securities include;
The economic elements which drive security prices include interest rates, unemployment and currency fluctuations. The U.S. Federal Reserve raises short-term interest rates to control inflation. Higher rates mean higher borrowing costs for individuals, who cut back on non-essential spending, and higher interest expenses for businesses, which reduce payroll and other operating expenses. Rising unemployment leads to further revenue and profit declines for companies, and security prices suffer. However, if the Federal Reserve lowers rates to stimulate economic growth, consumer spending and business investment resume. This leads to a virtuous circle of rising revenues, profits and security prices. Currency fluctuations affect exports and imports. When the U.S. dollar weakens against foreign currencies, exporting companies do well because American goods become cheaper. However, importers face higher costs and consumers may have to spend more on energy and other imports. Conversely, imports are cheaper and exports are more expensive when the U.S. dollar strengthens against other currencies.