What is the relationship between monetary policy and stock market?

Monetary policy and stock market are often closely linked closely, as government attempts to control monetary offer in the economy will usually affect stock investors. The most common ways to influence the monetary offer is either to have a central bank lower interest rates or change the amount of capital that banks must store in reserve. In both cases, the relationship between monetary policy and the stock market depend on how investors follow the news. One thing that alleviates the effect of monetary policy on the stock market is that most movements, such as interest rate changes, are expected by investors well in advance and are already taken into account in stock prices.

There are many ways to influence individual investors to incite or maintain the economy. Monetary policy is essentially the way the government uses money supply to maintain economic forces, such as growth, inflation and employment at a preferred level. Stock market often acts as a breakup for how the public perceivesthe economy and its potential. As a result, monetary policy and stock market often cooperate in Tandem in that the second responds to the first.

For example, how monetary policy and stock market can be connected, imagine that the government central bank announces that it will reduce its benchmark interest rate. This means that it will be easier for companies to borrow money. Many of these companies issue shares to investors, and as a result, these shares become more valuable if lower rates encourage business growth. Therefore, the stock market could see an immediate rise.

It is important to realize that the relationship between monetary policy and the stock market is sometimes not so simple. Psychological factors that work on investors' minds can have a significant impact when monetary policy is taken into account. By using the above example, investors may consider a sign of despair as a reduction in interest rates. Feelings that the governmentHe does not have sufficient confidence in the economy to correct, investors can sell their stocks to minimize the risk.

On certain occasions, the relationship between monetary policy and the stock market may be overestimated. It is rare that the change in the interest rate comes without any preliminary notification. For this reason, investors could already buy and sell shares in anticipation of the move, which means that the changes are already evident in stock prices. Whether the economic conditions control policy, it can also be clear to the ingenious investors, so both monetary policy and stock prices can be mere symptoms of basic economic reality.