The share market is an intermediate between firms willing to raise money and investors ready to make profits on returns. However, the share market is further categorised into two categories – primary and secondary. The primary share market is an intermediary between companies inclined to raise money from the public after relasing their IPO for the FIRST time through an initial public offering. On the contrary, the secondary share market is where the listed shares are bought and sold among the investors. There are companies who raise money in the pre-IPO stage as well. However, whether primary or secondary share market, both are highly volatile.
The supply and demand of shares determine the share market’s hikes and dips. Moreover, the ‘herd instinct’ also contributes to the highs and lows of the share market. For instance, if the investors readily buy a share, its demand increases, and so does the price.
However, there are several other factors affecting the prices in the share market in India, resulting in its volatility. Here we will discuss five crucial factors that determine the growth of the secondary share market in India.
5 Factors Causing The Hikes and Dips Of Secondary Share Market In India
The secondary share market in India is equally volatile as the primary market, at times even more than the primary market. Many factors contribute to the highs and lows of the secondary market, and below we have mentioned five major ones.
Interest Rate and Inflation
Banks are regularly changing their interest rates, sometimes to promote themselves and other times to make profits like any other firm. However, the increase in interest rates also results in a hike in lending rates. Further, the increased lending rates surge the costs for companies as well as investors. As a result, the surged costs impact the profit levels of the businesses, later affecting the price of listed and unlisted shares in India. On the other hand, inflation refers to the increased rates of goods and services over time.
Similar to interest rates, high inflation also casts down investments and long-term economic growth. During such times, there are firms who tend to halt their production and postpone their listed and unlisted share. Together, it all results in a fall in the value of money, succeeded by a fall in the value of savings. Apart from affecting the shares of big firms, interest rates and inflation also have the same effect on shares already purchased by the investors.
There are several economic indicators that derive the overall economy of India, which further creates the ultimate impact on the Indian financial market. For instance, the ups and downs of oil prices and GDP have a significant effect on the costs of the secondary share market. Moreover, India is a country where the majority of the economy is affected by the movements of oil prices since India heavily imports oil. Since it affects the economic numbers, eventually, it also has a significant impact on the share market. The ideology behind it is relatively easy to understand. The increase in oil price means an increase in the monthly expenses resulting in lowered savings and the inability to invest in firms or engagement with the shares of other investors.
Furthermore, the Gross Domestic Product (GDP) is the total economic production of India and determines the overall financial health of the country. A healthy GDP status creates a significant positive impact on the share market of India.
The primary reason behind the economic changes is the government policies. The government is expected to implement new policies in regard to the country’s economy. Every new policy can either bring massive profitability or lead the country to tighten its grip. If the effect of the guidelines is positive, the stock price will increase. Otherwise, the investors can expect a tough time, i.e. dip in the prices of shares in India.
Needless to say, the exchange rate of the Indian rupee constantly fluctuates in reference to other countries. This means both the rise and fall of exchange rates – in case the rate rises, and the Indian goods become expensive in the foreign markets. Else the price of Indian goods decreases in foreign markets. This affects the share price of companies involved in overseas business. Exchange rates can result in either of the two cases –
- A hike in the exchange rate leads to increased prices for importers, resulting in decreased demand for goods overseas—the revenue decreases, which means a decline in share price in India.
- On the contrary, the dip in exchange rates will have the opposite effect resulting in an increase in stock prices in India.
Politics and Natural Disasters
India, like any other nation, is subject to constant political changes. From budgeting to the election, government intervention and stability, every political factor affects the financial market of India, further initiating movements in the prices of the share market.
Moreover, natural disasters can also significantly affect the share market, and the most recent example of it is COVID-19. The economy of India goes down during natural calamities, and as a result, the share prices also go down.
Adhering to the said factors, investors can predict a profitable time to buy and sell their shares in the secondary market.