If you want to get serious about making your money work for you long term, then you need to move away from traditional savings accounts. Start investing your cash where there is more scope for growth. For many people, buying stocks is one of the most accessible ways to do this. This is especially true because nowadays there are more and more free platforms and apps available to help you build a portfolio.
Where stocks differ from a run-of-the-mill savings account however is that the value of your investments has the potential to go down as well as up. This means it’s crucial to do your research and understand the factors that can impact the performance of your shares. This won’t protect you from all risk. But, it will give you a much sounder foundation on which to build your investment portfolio
So what does affect the value of your investments? In this article we’ll discuss some of the key variables and why they are important.
Supply and Demand
Let’s start with some basic economics. The price of anything is determined chiefly by the balance between supply and demand. If nobody wants something, and there is a surplus of it, the price drops. By contrast, if the demand for something outweighs the supply, the price will rise.
It’s this basic principle that sets the price of stocks and you can read more about supply and demand at Investopedia. Of course, there’s plenty going on that’s driving supply and demand and causing these fluctuations in performance.
Company Performance
This is one of the most important factors affecting the share price of any individual company. If sales are good and profits high, it makes sense that stock is going to be in demand and become more valuable. If a company hasn’t been hitting targets, however, or costs have increased and eaten significantly into profits, this could cause a downturn in its stock value.
The internal infrastructure of a company is also important. Any major management changes can impact investor confidence. For example, this could be a new appointment or sudden death or resignation of the CEO for example. It could cause the share price to fall, even if just in the short term. Look out for changes in your investment value around key points in the company’s calendar. This includes things such as releasing annual reports, and being conscious of upcoming contract renewals, pending patents, or other things that could impact long-term profit projections.
Interest Rates
When interest rates are high, demand for stocks tends to fall overall. Thus, it brings down the price and value of your investments, slowing performance. This is because the rate of return on risk-free investments is better, making them a more attractive option.
Put simply – if you can get a guaranteed 5% return on a building society savings account versus 7% via stocks with significant risk attached, the stock investment isn’t going to seem as enticing as if the rate on the savings account is only 1%.
The Wider Economy
In the financial marketplace, nothing exists in isolation. So it’s important to understand key economic events and trends around the world that could impact stock prices. Macroeconomic factors such as pressures on inflation or interest rate rises in one country can have a knock-on effect on businesses in other parts of the world. So, it’s useful to stay in the know.
One simple way to keep on top of significant happenings is via the economic calendar. This is a tool that enables you to see, at a glance, upcoming announcements or economic policy changes and includes forecasts.
Global Politics
Linked closely to international economics is the global political situation. Changes in government or significant changes to current government policy can have implications for the economy and the value of your stocks, either through reduced or increased investor confidence in the leadership in general or because of changes in legislation or the introduction of new initiatives that impact particular industries.
Climate Change
This might not be one you immediately think of. But our changing climate can have a big effect on the value of your investments. 50 years ago for example, you wouldn’t have seen a market for electric car charging or renewable energy, but as the climate and our attitude to environmental issues changes, we will see developments in the stock market that mirror these trends.
That’s not to say that rushing out and investing in any kind of ‘green’ stocks is a guaranteed win. This is uncharted territory and these sorts of stocks are often volatile.
Major Investor Activity
Individuals or institutional investors with large holdings in a particular company can play a part in setting the share price, as any buying or selling activity from them will cause more of a significant supply and demand shift.
Conclusion
While there are plenty of unknowns when it comes to investing in stocks, the potential gains in performance make them an attractive option for ambitious investors looking to grow their wealth long term.
However you choose to invest, remember that the value of stocks can go down as well as up, so take expert advice when you need to.
