Relationship between Stock Market Prices and Macroeconomic Variables Essay

Relationship between Stock Market Prices and Macroeconomic Variables - Essay Example This is an indication that the indexes will rely majorly on the stock prices of the major companies in the capital market. Therefore most financial experts like relying on this index as it is closer to representing the real market. According to Madura (2008, pg 347), the index is calculated by considering the stock price of five hundred biggest companies in the market. It explains that the companies are selected based on their market capitalization. To understand this dynamic relation the relation between the stock price and the variables in the macro economy, a clear and incisive analysis of the effects of these variables on the financial markets is required. This paper examines some of the relationships between the stock prices and market indices and the variables of the macroeconomic environment within economies of countries like the United States and England. Â  The GDP of a nation covers all the products and services produced in a single financial year. In Berezina (2012) opinion, it covers the entire products, from the smallest item to the largest possible item and services purchased by the consumers in this economy. It notes that investors pay keen attention to indicators of sustainable growth in the GDP of an economy to make decisions on investment. When the report shows that there is growth in GDP, many investors will be attracted to the economy. This translates to higher stock prices as investors rush to acquire stakes in companies within these economies. In the absence of growth, the investor confidence is low and the stock prices are likely to slump. This is usually reflected in the performance of the index of the market. Analysts believe that the performance of a market over a financial year will reflect the overall performance in GDP. For instance, Madura (2008) explains that economic factors that affect the stock prices includ e indicators like GDP (Madura 2008, pg 270).