What Drives Index Prices?

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Indices are calculated from the share prices of the stocks within the index.

If the share prices of the stocks in the index rise, the index will rise. If the share prices of the stocks in the index fall, the index will fall.

Share prices can be influenced by many different factors. Some of the main drivers of share prices include:

  • Economic news

The stock market and the economy are closely linked so any economic news such as news in relation to GDP figures, unemployment rates, or interest rates can impact share prices.

Strong economic data, or better-than-expected economic data, tends to push share prices and indices up. Weak economic data, or worse-than-expected economic data, tends to push share prices and indices down.

  • Political Instability / Geopolitical Events

Investors hate uncertainty so any geopolitical events that increase uncertainty, such as conflicts between countries, terrorist attacks, trade wars, or social unrest tend to have a negative impact on share prices and stock indices.

A good example here is the FTSE 100 index immediately after the Brexit vote. Due to the increased uncertainty associated with the Brexit vote result, the FTSE 100 crashed.

  • Company Announcements

Company announcements can have a big impact on share prices.

For example: If a company announces that its full-year profits are much higher than the market was expecting, its share price is likely to rise. If a company has a large weighting within an index, its share price movements can have a significant impact on the index’s price.

For example: When Apple – which has a dominant position in the NASDAQ 100 – rises, the NASDAQ 100 often rises too.

  • Currency Movements

Currency swings can impact share prices and therefore also affect index prices. The FTSE 100 is a good example of an index that is highly sensitive to currency movements.

Many of its constituents generate revenues internationally, so currency movements can affect the value of those revenues.

When the pound weakens, FTSE 100 share prices tend to rise (because those international revenues are worth more in GBP terms), pushing the index up.

  • Investor Sentiment

Human emotions play a dominant role in the stock market.

When stock prices are rising, investors tend to get greedy. This can result in more buyers than sellers, pushing share prices and stock indices higher.

Conversely, when share prices are falling, investors tend to be fearful. This can result in more sellers than buyers, which pushes share prices and indices down.

Reprinted from eTorothe copyright all reserved by the original author.

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