The three main areas of investment you can explore when you want to venture into business are the stock market, the forex market or the real estate. Each of these three markets operates under different rules, even though they influence each other. There are many ways the forex market influences the stock market and vice versa. As a general rule, all the markets in the economy move in different directions depending on the movement of money. It is therefore difficult to determine the extent to which each market influences the other. Nevertheless, it is possible to know the different ways in which the markets affect each other. The following is a highlight of how the stock market affects the forex market.
Market sentiment
The investor attention to the market can affect the forex market in a big way. It is a commonly known fact that there exists a crowd psychology in most markets. The stocks market performance is based on how much confidence the investors have on the assets being traded. If for any reason investors start losing confidence in particular stocks, the investments will start to fall. This will lead to a larger perception that the economy might not be faring well. When investors pull out, they take their money with them and this has direct effects on the currency exchange markets. An economy that is losing units of foreign currency will end up seeing a devaluation of its currency. This, in turn, has a direct effect on forex trading (also known as prekybos finansų rinkose in Europe) since the value of the asset of trade has been changed. The market sentiment is, therefore, a key factor in the stock market which has a direct effect on the forex market.
Global trade
Other than investor attention, the connected global market also has a huge role to play in how the stock market influences the forex market. Most multinational companies that are publicly owned are especially instrumental in changing market dynamics. Multinational companies have a global reach and are thus directly involved in the forex market in one way or another. Huge companies that operate globally like Coca-Cola have a direct impact on currency exchange. When recessions happen, they are almost always as a result of a falling economy.
The economy can decline due to various reasons but the most likely is due to a decline in stocks value. Major news about the economy also first affect the stocks market and the companies in it before any other markets. The big corporates can also initiate the process of a poor performance in the stocks market when they make bad investment decisions. If for any reason a big company stops profiting, the reduction of spending by that company will definitely reflect in the economy. This will then ultimately affect the value of the currency in the forex market.
Since the stock market has a huge bearing on the economy, it is often the first source of information for investors, consumers and other stakeholders of the economy who want to understand the direction the currencies might take. Such indicators show how the economy is performing and ultimately determine how the forex market is fairing as well. Basic goods that are usually at the top of consumers priority lists are vital for determining the price and general inflation in the economy. The general inflation rates affect the interest rates. Interest rates, in turn, affect the level of investments. The investments are ultimately the main factor that determines the value of a currency at the forex market.
In Summary
All markets in the economy affect each other in different ways. A radical change in any aspect of the economy will thus have an effect on the markets. The market that affects the economy the most though is the stocks market. This is mainly because of the capital nature of the economy. The stocks market is the perfect illustration of how a capitalist economy works. The performance of the companies listed in this market is what primarily heralds the start of either a recession or expansion of the economy. A recession would adversely affect the value of the currency in the long-term and this would be reflected in the forex market. An expansion would also be reflected in the forex market in the form of a strengthening local currency.
