Since the price of crude oil started to go up, people have been talking about how it might affect the stock market and your investments. Now, if you think about it logically, it does sound like it would have an effect. If oil prices change and it costs a company more to run, it seems like that would affect the share price. The same goes for the idea that people will be less or more likely to buy shares in a company that has something to do with oil. So, if you were poor, would you put your money into a company that sold hose sockets? But is this idea that the price of crude oil affects the stock market true?
The idea behind this theory is that since many companies ship their goods by freight, they have to pay more to ship their goods when the price of oil goes up. The price of the product goes up as a result. So, if the company wants to keep the price of their product the same, they will make less money and the price of their shares will go down. Makes sense right? Not necessarily!
When the cost of making a product or providing a service goes up, companies usually raise the price of the product or service. So the margin of profit will stay about the same. But if people's feelings about the product change, especially among stock market investors, the industry might suffer.
Yes, global events that change the price of things like oil (like Hurricane Katrina) do change the way people feel about investing. People and investment companies tend not to change their portfolios too much when there is a big rise or fall. But when the price of something goes up over time, people tend to do less. We all know that oil prices are going up, but it's not like when something big happens.
As soon as something bad happens, fear spreads like wildfire. The fear of one person becomes the fear of the whole investment business. So nobody buys or trades, but a lot of people usually sell. So no one really knows what's going on. When things calm down, the market does, too.
So, yes, the price of oil will affect the price of shares if there are a lot of bombs. But it won't matter in the long run if there is growth. In the last five years, the price of oil has gone up by almost 400%. But have shares gone up or down?
Not really, since oil has become more valuable, people want it even more. And if you own stock in an oil company, you'll get that piece of Texas gold you've been looking for. So the price of oil shares hasn't changed much, or if it has, it's gone up.
So, if we know that changes in the market will affect the price of shares because they depend on how people feel about buying and selling shares, we can predict the change. If your mood changes, it's almost certain that the market will also change. So you can sell, but there is also a chance that the price will go up again if you wait too long.
