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War & weather shake your stocks

Shares traders need to have an international perspective, watching out for important developments in other countries.

Elections, coups and even the weather in foreign countries can have a big impact on the shares you trade.

 

Elections, coups and even the weather in foreign countries can have an impact on stock markets overall and will have a particularly strong impact on certain companies depending on where they have their operations, where they source or sell goods and the kind of business they do.

It is important therefore to research carefully any company you invest in.

Find out which are their biggest export markets, where their production facilities are and which countries they rely on for imports. Then keep up-to-date with developments in those countries and their neighbours.

Research carefully any company you invest in – find out where their biggest export markets are, where their production facilities are located and which countries they rely on for imports.

 

Changes of government

Changes of government can have a big impact on the shares you trade and can push their price in either direction.

Whether shares rise or fall will depend on what traders expect from a country's new leaders.

Political uncertainty tends to make share prices more volatile as markets wait to make sense of an unfolding situation.

If, for example, a change of government is triggered by violent street protests, shares might fall sharply when demonstrations first start, but may start to rally if traders believe that they will trigger the installation of a new, better government.

More uncertainty might follow once a new government is in place and traders try to gauge what its economic policy will be and also how secure leaders are in their new roles.

Share price volatility increases the risk that traders face when they are buying or selling shares. It can also present an opportunity though for short-term traders – especially those looking to short-sell stocks.

Even peaceful general elections can have a big effect on share prices. If there is no clear winner to an election – for example Italy’s general election in February 2013 – stock markets can suffer as traders fear a prolonged period of uncertainty and political inaction.

Uncertainty makes share prices more volatile. This increases your trading risk but can present an opportunity for short-term traders.

 

Conflict

Conflict is nearly always bad for stock markets but can produce unexpected benefits for the share price of certain companies.

If, for example, suppliers of vital commodities such as oil are disrupted, this can push up their price sharply.

That could be good news for producers of that commodity, as long as their own production facilities or other infrastructure that they have invested in has not been damaged.

The longer-term prospects of construction or engineering companies can also improve as a conflict approaches its end. This is because they may have the opportunity of winning contracts to help rebuild key infrastructure like roads, hospitals and airports.

Conflict is nearly always bad for the stock markets, but may produce unexpected benefits for certain companies.

 

Weather and natural disasters

Freak weather conditions such as typhoons or earthquakes can wreak havoc on a country, causing billions of dollars worth of damage and even bringing economic activity to a temporary standstill.

As with conflicts, however, there is usually an opportunity to be found for shares traders somewhere.

Weather can affect the price of commodities, causing shortages or oversupply of certain crops. This will affect their price and the share price of companies producing or consuming them.

 

Tokyo’s stock market plunged more than 20% in the two days immediately following the huge tsunami that struck Japan’s eastern coast in March 2011, while the FTSE 100 lost tens of billions of pounds in market value.

Because the tsunami also triggered meltdown at a big nuclear plant, confidence in the global nuclear power industry took an immediate dive, with several countries announcing that they would stop building nuclear power plants.

Companies with any connection to nuclear power – reactor builders, utilities or uranium miners – saw their shares slide.

Gas prices however jumped on expectations that more gas would be needed to replace nuclear energy, and this helped support share prices of gas producers even while global stock markets were tumbling.

When these events happen, you should be aware of not only the companies that can be adversely affected, but those that may benefit too.

Weather can affect the price of commodities in a less extreme form. A drought just before the harvest of an agricultural commodity like wheat, for example, can create a shortage and push up prices. Conversely, perfect weather conditions can create a bumper crop of a commodity – more supply than demand will push down prices.

This will affect the share prices of companies that either produce, consume or are otherwise exposed to that commodity's price.

When traumatic events happen that can seriously affect infrastructure and the economic environment, you should be aware of not only the companies that can be adversely affected, but those that may benefit too.

 

Summary

In this lesson you have learned that ...

  • ... shares traders need to have an international perspective, watching out for important developments in other countries.
  • ... elections, coups and even the weather in foreign countries can have an impact on stock markets overall and will have a particularly strong impact on certain companies.
  • ... you should therefore research carefully any company you invest in, finding out which are their biggest export markets, where their production facilities are and which countries they rely on for imports – then keep up-to-date with developments in those countries.
  • ... changes of government can have a big impact on the price of shares.
  • ... whether share prices rise or fall will depend on what traders expect from a country's new leaders.
  • ... political uncertainty tends to make share prices more volatile as markets wait to make sense of an unfolding situation.
  • ... share price volatility increases the risk that traders face when they are buying or selling shares, but can present an opportunity for short-term traders.
  • ... conflict is nearly always bad for stock markets but can produce unexpected benefits for the share price of certain companies.
  • ... freak weather conditions such as typhoons and earthquakes can wreak havoc on a country, causing billions of dollars worth of damage and triggering massive stock market falls. This can be detrimental to some companies, while others may benefit.
  • ... weather can also affect the supply and demand of certain commodities – this will affect the price of those commodities and the share price of companies that produce or consume them.