Stocks are bought and sold all around the world. There are many different daytrade stock exchanges and stock markets that are open at different times. While the New York Stock Exchange may be closed, trading may be going on in London or Tokyo. A large decline in the European markets can cause the U.S. markets to also drop in reaction to what is going on overseas.
While there are more than 100 countries in the world and many of them have their own stock markets, only a handful have any meaningful effect on the financial markets. The main movers of financial markets include the United States, England, Germany, France, China, Japan and a few others.
There are many different types of financial markets besides the stock market. There are currency markets. There are bond markets and there are commodity markets. The performance of stocks can have a direct effect on all of these markets.
In the world of investment and high finance, there are choices. One can invest in gold, buy bonds or trade currencies. Financial markets do not move in unison. Stocks rise and fall and their movement has an effect on other financial markets.
In the case of the precious metal market, rising stock prices have an inverse relationship with gold and silver prices. While the correlation is not zero percent, it is somewhere less than 50%. What that means is that when the stock market goes up 300 points, it is more likely than not that the price of gold will drop. When stocks are in a very bullish environment, they become a more attractive investment option than gold or silver. Simply stated, your investment dollar will out-perform the rate of return you might get by buying gold.
Stocks also affect the world currency market. If stocks are doing well in the United States, foreign investment dollars will seek investments in the U.S. stock market. When foreigners want to invest in the U.S. they must convert their country’s currency to the U.S. Dollar. That has the effect of strengthening our currency and making it worth more in relationship to other currencies.
Perhaps the biggest way that stocks can affect the financial markets is the amount of uncertainty they create. When financial markets do not know which way the stock market will go, they become extra cautious. Money can be pulled to the sidelines until there is more clarity. Stocks affect financial market and financial markets affect stocks.