How do Elections Affect Stock Markets?

6 mins read
by Angel One

Stock markets are volatile and are largely affected by local and global happenings. The same holds for elections. An election is a major event in any country that decides the future direction of its economic, social, and political growth. Indian stock markets are susceptible to election fever and experience greater volatility during that period. We already know that stock markets are affected by elections, but the question ‘How does it happen’ remains. Before diving deep into the elections and stock markets, let us first understand what are stock markets and how do they work.

What are stock markets?

A stock market is an arrangement where the buyers and sellers come together to sell and purchase stocks or shares of the companies listed on the stock exchange. A stock market arrangement is crucial to help companies raise funds from the public for further expansion or to ensure smooth operations in exchange for a percentage of ownership in the company in the form of shares or stocks.

How does a stock market work?

It allows buyers and sellers to negotiate prices and transact through a stock exchange. The companies willing to raise public capital list their shares on the stock exchange through an IPO or Initial Public offering. Once the shares start floating in the market the investors can buy or sell them among themselves, helping the company to raise capital.

How are the stock prices determined?

The prices of various stocks in the stock market are determined by the forces of supply and demand. If the demand for a particular stock, i.e., the number of buyers outnumber the supply of the stock, i.e., the number of sellers, the stock price rises. Similarly, if the number of suppliers, i.e., the sellers is more than the buyers, the stock prices decrease.

How do the investors make buying and selling decisions?

Investors analyze the recent news and happenings to decide whether to buy or sell a stock. Any positive news for a company creates positive sentiments in the market, inducing people to buy that stock and vice versa. For example, the Airports Authority of India handing over the maintenance of Jaipur International Airport to Adani Group indicates business expansion and greater authority for the company. This creates positive market sentiments surrounding the shares of the Adani group leading to a rise in demand and an increase in share price. Similarly, an increase in Corporate tax by the government of India is likely to create negative market sentiments leading to an overall plunge in stock prices.

How are stock markets affected by elections?

Elections are one of the most volatile times for the stock market as they bring a lot of uncertainty with them. Just like the economic changes, political changes like elections or policy changes have a huge impact on the stock market. It is generally assumed that if the election outcome is in favor of the existing government, the stock market rises as it indicates political stability and vice versa. However, there are various other reasons why elections affect the prices in the stock market. Let us have a look at the factors that determine the relationship between elections and stock markets.

  • What is there in the election manifesto?

An election manifesto is a list of all the economic, social, and environmental policies that the contesting parties promise to enact once they get elected. If the election manifesto of a particular party consists of policies that will bring about economic growth in the country. For example, if a contesting party promises to slash tax rates in their election manifesto and the majority of its policies are directed towards economic development, the likelihood of its win might lead to a rise in stock prices.

  • The ideology of the government

If the party that has a better vision for economic growth throughout its tenure and has a 5-year roadmap is more likely to win, it will create positive market sentiments leading to an increase in share prices. Similarly, if a party with vague and unclear promises shows signs of winning the election, it will create negative market sentiments and lead to a plunge in share prices.

  • Exit poll results

The results of exit polls indicate the possibility of a particular party winning. An exit poll is like a mock poll conducted before the elections to predict which party has a brighter chance of winning. If the party having better economic policies has higher chances of a win, stock prices will increase and vice versa. If the result of the exit poll is in favor of the existing party, it will indicate political stability, and the prices in the stock market will increase.

  • Expected economic policies

If the party that has a higher chance of winning is expected to introduce better economic policies to facilitate the country’s growth and development, the share market might show an upward trend.

  • Which sectors or industries are expected to boom

The pre-election and post-election period uncertainty not only affects the stock market as a whole but also has a major impact on different industries. For example, if the winning party plans to focus on infrastructure development in the country, the stocks of infrastructure and real estate industries will increase. Similarly, if the election manifesto of the winning party has a policy that could adversely affect the pharmaceutical sector, it will lead to a decrease in the stock prices of pharma companies.

  • Personality and popularity of the leader

The personality of a leader also determines the price trend in the stock market. For example, if the leader has a great personality and is influential, he will be able to draw more foreign investment in the country, creating positive sentiments leading to an upward stock market trend.

The stock market is the most unpredictable aspect of the modern world, but there are still some things that can help you predict its behavior. Elections are one of those things. When an election is coming up, the stock market is often more sensitive than usual. The relationship between stock prices and elections is very complicated and cannot be predicted accurately. However, looking at the election manifesto, ideology, policies, and exit poll results can help predict the trend in the stock market.