Final answer:
Share prices are influenced by interest rates, economic outlook, inflation rates, economic and political shocks, changes in economic policies, and exchange rates. Lower interest rates generally lead to higher share prices, while a positive economic outlook boosts prices. In contrast, high inflation, shocks, and unfavorable policy changes can negatively impact share prices.
Step-by-step explanation:
The relationship between share price and various economic factors can be complex but some general trends help investors predict how a share price might move in response to certain economic changes. First, share prices and interest rates often have an inverse relationship; when interest rates rise, share prices typically fall as borrowing costs increase and investment attractiveness reduces. Conversely, when interest rates are cut, share prices might rise as cheaper borrowing costs can lead to increased spending and investment.
Next, the economic outlook greatly influences investor sentiment and expectations. A positive outlook typically leads to an increase in share prices as future profits are anticipated to be higher. In contrast, a negative outlook can dampen investor enthusiasm and drive share prices down. Inflation rates can also affect share prices, generally negatively, as higher inflation can erode purchasing power and lead to higher input costs for companies, which may squeeze profit margins.
When it comes to economic and political shocks, these events can lead to uncertainty and volatility in the markets, often causing significant fluctuations in share prices as investors react to the news. Changes in economic policies, such as fiscal stimulus or regulation changes, can also influence share prices, as they might alter the economic landscape and affect company profits. Lastly, exchange rates can influence share prices through their effect on international trade and the relative value of profits earned abroad when converted back to the domestic currency.