Stock Market

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Where P = stock price

D = dividend per share

k = discount rate

g = growth rate

In this scenario, stock prices will rise. Unexpected inflation also leads to an increase in the rate of interest. Moreover, the discount rate will increase, and this will lead the real income to decrease.

The value of one country’s currency can be set against that of another currency, and this is known as the exchange rate. In general, a rise in the exchange rate will lead to larger amounts of foreign currency exchange against domestic currency – and increase demand for domestic currency. In an open market, it is possible to increase the stock market value through currency exchange to boost the price of shares. Otherwise, stock market funds will transfer to the foreign currency market. Hence, different countries’ economies are affected by the global exchange rate, which means the stock market is also influenced (Chkili and Nguyen, 2014). The most important impact of exchange rate fluctuation is on imports and exports. The performance and profitability of companies and foreign capital imports and exports is profoundly affected by the exchange rate (Osamwonyi and Evbayiro-Osagie, 2012). An increase in the exchange rate is a positive influence on industries that import materials, such as the paper industry and the air transport industry. If companies sell the majority of their commodities to overseas markets, when the exchange rate increases, the market competition will decline, which in turn will decrease profitability. Companies that rely on importing resources will suffer lower costs due to a stronger domestic currency, and so will achieve higher profits and higher share prices. The exchange rate not only influences the competitiveness of international companies but also affects domestic companies. Panetta, (2002) argued that a high exchange rate benefits domestic firms by increasing competition and improving future cash flow, thus stock prices increase. However, export companies benefit when the exchange rate is lower because the domestic product is cheaper to overseas clients (Dornbusch and Fisher (1980). The effects of exchange rate on stock price depends on opening price and trade type.

Stock price is not only affected by intrinsic value but also by complex relationships with macroeconomic variables. This paper describes five such variables and analyses their impact on the stock market. GDP is the most significant contributing factor regarding the domestic economy. For example, high GDP gives individuals and investors confidence. High performing companies are more attractive to investors; this increases the stock price and demonstrates that GDP and stock price positively correlate. There is also a positive relationship which can be identified between money supply and stock price as when an increase in money supply encourages consumption and investment. Interest rates, however, have a negative effect on stock prices. Individuals are less inclined to save during a period of low interest rates, as they will achieve less revenue for saving. Consequently, they invest their money in the stock market, which stimulates price rises. Inflation is a complex factor that affects share price in a number of ways. Inflation can be divided into two types: expected inflation increases, which offer businesses the opportunity to increase profits (and therefore has a positive impact on stock prices); and unexpected inflation, which has a negative influence in terms of the dividend valuation model. The effects of inflation, however, depend on opening degree and trade type.

References

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