A stock's price will go up and down based on what investors think about that individual company, its industry sector, or its competitors. But the economy can also play a role in stock prices. Stock prices go up and down in response to:
Interest rates:
The Bank of Canada can raise or lower interest rates to stabilize or stimulate the Canadian economy. This is known as monetary policy. If a company borrows money to expand and improve its business, higher interest rates will affect the cost of its debt. This can reduce company profits and the dividends it pays shareholders. As a result, the stock price may drop.Economic outlook:
If it looks like the economy is going to expand, stock prices may rise. Why? Investors may buy more stocks thinking they will see future profits and higher stock prices.Inflation:
Inflation means higher consumer prices. This often slows sales and reduces profits. Higher prices will also often lead to higher interest rates. For example, the Bank of Canada may raise interest rates to slow down inflation. These changes will tend to bring down stock prices. However, commodities and some industries and companies can do better with inflation, so their prices may rise.Deflation:
Here, the cost of goods and services drops. A dollar buys more. Interest rates rise, so people borrow less. They often wait to buy goods in the hope that prices will drop more. The Great Depression (1929-1939) was one of the worst periods of deflation ever.Economic shocks:
Big changes in the world can affect both the economy and stock prices. For example, let's say energy costs rise. This can affect a lot of companies and consumers and lead to lower sales, lower profits, and lower stock prices. Another example is an act of terrorism, which can lead to a downturn in economic activity and a fall in stock prices.Changes of government:
A new government can make new policies. Sometimes these changes can be seen as good for business, and sometimes not. Sometimes they may lead to changes in inflation and interest rates. These changes may affect stock prices.The value of the Canadian dollar:
Many Canadian companies sell products to buyers in other countries. If the Canadian dollar rises, their customers will have to spend more to buy Canadian goods. This sometimes drives down sales, which in turn can lead to lower stock prices. On the other hand, when the price of the Canadian dollar falls, it makes it cheaper for others to buy our products. This can make stock prices rise.
Remember: Many factors can affect stock prices
Some are easier to understand and track than others. You may find it helpful to draw on the research and expertise that a registered advisor can provide.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.
