How Indicators Influence Market Conditions

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  • 0:07 Different Types of Indicators
  • 0:34 Economic Indicators
  • 3:22 Technical Indicators
  • 5:14 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

The stock market offers an opportunity for investors to accumulate a significant degree of wealth. Investors often use tools called indicators to help them make investment decisions. In this lesson, you'll learn about these tools.

Different Types of Indicators

Meet Gordon. He's an analyst for a stock brokerage firm. He spends his days reviewing different types of indicators in an attempt to predict if the stock market will go up or down. An indicator is simply a statistic that can be used either to understand the current condition of the stock market or to predict where it is going. Gordon can use both economic indicators and technical indicators to help predict the direction of the market. Let's look at each in a bit more detail.

Economic Indicators

Economic indicators are economic data that is used by investors to analyze the current condition of the economy to predict trends in the stock market. If the economy is healthy, that means it's growing and companies are making profits. On the other hand, if economic indicators show slowing economic growth, that may mean sales will slow and profits will go down. In fact, some companies may lose money or even go bankrupt. Gordon is sure to look at certain key economic indicators when each is released.

One of the most important economic indicators is employment. Gordon knows that employment is important for business profitability because consumer spending makes up around two-thirds of all economic activity in the United States. If people aren't working, then they can't buy. If they can't buy, businesses can't sell and will lose money. Sustained rates of low employment tell Gordon that the stock market may be going down in value as declining sales result in declining revenue. Investors will be less willing to buy shares of companies with declining sales, and this will put downward pressure on stock prices.

Another important economic indicator that Gordon carefully reviews is inflation. Inflation is a measure of the increase in the general price level in an economy, and it also tells us if interest rates are going up or down. Increases in the rate of inflation tend to mean interest rates for loans increase. This makes borrowing more expensive for both businesses and consumers. Consumers may decide not to spend, which will reduce sales revenue. Higher interest rates also cut into company profits because bankers get the money instead of shareholders. High rates of inflation can indicate that the stock market will head south.

The consumer price index, or CPI, will tell Gordon the rate of inflation for consumer products, while the producer price index will tell him about the cost of producer goods. Increases in price may cause consumers to decrease spending and may make it more difficult for companies to produce goods and services. This can result in reduced profitability and provide downward pressure on the market.

Gordon also pays attention to the country's gross domestic product. The gross domestic product, or GDP, measures the economic output of an economy. It is the total value of all the goods and services produced in an economy during one year. If the GDP is growing, then the economy is growing and spending is strong. This means that companies will have strong sales, which should increase profits. The market should react positively and go up. On the other hand, if the GDP contracts, that means there will be less spending and sales will go down. Companies will be less profitable and may even lose money. The market will typically react negatively to a contracting GDP and decline.

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