An index’s value changes as the prices of its constituent shares fluctuate, so it will mirror any general upward or downward trend in stocks.
The factors that move indices are therefore essentially the same as those that influence individual shares. The difference is that an event affecting just a single company will generally have only a minor impact on the value of any index that includes the stock.
However, economic or political events relevant to a group of companies or a business sector, such as mining companies, technology firms or banks, can have a significant effect on an index that contains these shares. As the balance of supply and demand for the stocks shifts, the collective change in share prices can cause a move of multiple points in the index.
And of course, when an event has implications for an entire country or region’s businesses, or even the outlook for the global economy as a whole, its impact on stock indices can be dramatic.
You can expect movement in the value of an index when the following events occur in a related country or business area:
- Economic data releases
- Central bank announcements
- Geopolitical events and wars
- Natural disasters
- Government policy, legal and regulatory updates
- Corporate news – good or bad
All of these can affect investors’ confidence in the prospects of companies to grow and generate profit, which in turn directly shapes market sentiment.
The collective mindset of traders and investors affects the movement of all indices.
Major or unexpected events in particular can sometimes cause a surge in bullish or bearish sentiment, leading to pressure from buyers or sellers that forces share prices – and so index values – up or down. A correction is often seen later, as traders calm down and equilibrium is restored.