Stock markets are driven by three factors i.e. Fundamentals, Liquidity and Sentiments. Stock markets are largely driven by liquidity and sentiments. Although if you invest for a long time on the basis of fundamentals, you are bound to get good returns. Most of the fund managers invest on the basis of fundamentals. However, general public are always swayed by the short term profit greed thereby ignoring the fundamentals altogether.

Fundamentals:

We always hear about fundamentals in stock news channels, from fund managers or from some equity analyst. What are these fundamentals? Fundamental analysis is a method used to analyze the security’s worth by studying the financial statements of the company. Although fundamentals rarely impact the stock market movements, they can be used as a measure for comparative analysis with other companies. There are various tools used to conduct the fundamental analysis such as ratio analysis and valuations. If the company looks good on the basis of fundamentals, be rest assured that you will get good returns if not today than may be in future.

Liquidity:

A market is considered to be liquid if traders can quickly buy and sell securities with minimal price effects. In fact liquidity is considered to be the most important factor for stock markets to survive. The relationship between liquidity and stock market is fairly simple. More liquidity means more money flow which results in to additional demand for equities which in turn increases the stock prices. Technicals of the company are formed by a combination of liquidity and sentiments. Share prices in the stock market are largely driven by liquidity. More the investments in stock, the higher the stock price goes. Rise in the Indian stock markets in the recent times was largely attributed to huge FII inflows. In fact most of the stock markets all around the world are largely driven by liquidity.

Sentiments:

If the index is rising or additional liquidity is infused in stock market, it automatically upbeats the market sentiments. However, if the index is falling or there is no liquidity in the market, it leads to a bearish market sentiment.