Why does confusion and uncertainty affect stock markets?
Over the last few months, both before and after the general election, uncertainty has had a massive impact on stock markets around the world and especially the UK. But why does confusion and uncertainty unsettle investors so much?
In order to value any share or any asset there needs to be an understanding of the potential growth in the future, demand and supply. If any of these elements are uncertain then it is almost impossible to forecast the value in the short, medium or longer-term. The UK economy is a major element of any financial forecast and if investors know the short-term will be difficult while perhaps the medium-term will be positive then an estimate on the current and future value of any asset is not too difficult. While nothing is ever certain, the more elements which are "visible" the more chance of arriving at a believable value.
However, if one or more of these elements are uncertain then it is very difficult if not impossible to forecast the future value of any asset and this is where investor confidence could potentially take a big hit. In times of uncertainty many investors will look on the downside and this can lead to significant reductions in stock market indices which can trigger more selling and more concern which can lead to a vicious circle.
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