By Vikas Madhukar and Vani Aggarwal

Despite the potential benefits of trading and stock market investments, a significant number of individuals in India incur financial losses in these markets. This challenge is particularly pronounced among new and inexperienced investors. It is vital to do a comprehensive analysis and look at the factors that influence stock prices.

Performance indicators

The financial performance of a company, such as its revenue, earnings, and profitability, can have a significant impact on its stock price. Positive financial results often lead to increased investor confidence and higher stock prices, while poor performance can result in lower stock prices. Moreover, technological advancements, regulatory changes, or shifts in consumer preferences can impact the prospects of companies within a particular industry. Positive developments can drive stock prices higher, while negative trends can lead to declines. Also, economic factors such as GDP growth, inflation rates, interest rates, and employment levels, can affect stock prices. A strong economy generally leads to higher corporate profits and investor optimism, which can drive stock prices up. Conversely, economic downturns or negative indicators can lead to lower stock prices.

Further, the government policies, regulations and fiscal measures can impact stock prices. Changes in tax policies, trade agreements or industry-specific regulations can influence the profitability and prospects of companies, thereby impacting their stock prices.

Interconnected factors

All these factors are interconnected and can interact in complex ways. Stock prices are influenced by the collective actions and expectations of numerous investors in the market. Therefore, predicting stock prices accurately based on these factors alone can be challenging.

Next it is important to track investor sentiment and market psychology as these factors play a crucial role in stock price movements. Therefore, it is critical to develop an empathy map to understand the sentiments and behaviour of any investor that would ultimately contribute to investment decisions.

The empathy map reflects positive sentiment, driven by optimism and confidence, which can lead to increased buying activity and higher stock prices. Conversely, negative sentiment, fueled by fear or uncertainty, can result in selling pressure and lower stock prices. Sometimes investors get greedy and become overly optimistic that leads to a bad investment decision.

Also, investors see and hear news related to a company, industry or the broader market that can impact stock prices. Positive news such as new product launches, strategic partnerships or favourable regulatory decisions can boost investor confidence and drive stock prices up. Negative news such as lawsuits, management changes, or geopolitical tensions can have the opposite effect. Global events and trends (geopolitical tensions, international trade dynamics, or currency fluctuations) also have spillover effects on stock markets worldwide.

Investors should conduct thorough research, analyse multiple factors and consider their risk tolerance before making investment decisions. It is crucial to develop a comprehensive strategy that considers factors like financial literacy, regulatory measures, investor behaviour and technological interventions.

Author Vikas Madhukar is pro vice chancellor, Amity University, Haryana and author Vani Aggarwal is assistant professor, Economics and Analytics, SOIL School of Business Design. Views expressed are personal.