The Influence of Political Events on Global Stock Market Indices 

A stock exchange is a market where we can buy and sell shares of companies and other financial instruments. You may now ask how the prices are determined. Well, the trades in a stock market determine the stock prices, thereby reflecting the perceived value of a company and market conditions. It is where companies raise their capital, and we, the investors, grow our wealth. It serves as a platform for trading various companies’ securities.

Table of Contents

• Major World Indices
• How Political Events Influence the Global Stock Market Indices
• Risk Management Strategies
• Conclusion

A stock exchange is a contributor to economic growth. The trading process involves continuous disinvestment and reinvestment, which aids in capital formation and leads to economic growth. 

Every stock market has one or more than one index. So, what does an index do? A financial index simply produces a numeric score based on various inputs. It helps us consistently track the performance of a group of assets. Simply put, they measure the performance of a basket of securities intended to replicate a certain market area. 

Political events often influence stock markets. Political events not only impact domestic markets but also the global stock markets. The influence is complex and multi-faceted depending on factors like the nature of the event, economic climate, and investor sentiments.

We will discuss how political events impact the stock markets, but first, let us look at the major world indices.

Major World Indices

• NASDAQ-100: It is one of the most followed market indices in the world. It is a market index of the United States of America. The NASDAQ-100 consists of almost all the companies listed on the stock exchange of the same name. 
• S&P 500: It stands for Standard and Poor’s 500. So, this index is also of the United States of America and tracks the performance of the top 500 companies listed in the United States. It comprises approximately 80% of the total market capitalization of public companies in the United States.  
• Hang Seng Index: This is a Hong Kong market index. It is the primary indicator of the largest companies listed on the Hong Kong Stock Exchange as it tracks and records their daily changes. 
• FTSE 100: It stands for the Financial Times Stock Exchange 100 index. FTSE 100 is the United Kingdom’s most popular stock market index; it is also referred to as “ Footsie,” so don’t get confused. As you might have guessed, this index consists of the 100 most highly capitalised blue-chip stocks on the London Stock Exchange. 
• Nifty 50: It is a benchmark of our Indian Stock Market. Nifty 50 records the average performance of 50 of our largest companies on the National Stock Exchange.  

How Political Events Influence the Global Stock Market Indices

Political events highly influence global stock markets. You may wonder why it influences the markets so much. This is mainly because it depends on factors like its nature, impact on economic conditions, and the prevailing global economic situation. 

• Uncertainty: Policy changes, political instability, and elections create a sense of fear and uncertainty in the minds of investors and traders alike. This uncertainty increases market volatility. During these times, we take a cautious approach, where we sell off and the market declines. 
• Economic Policy Changes: Sudden changes in the government’s financial and monetary regulations can directly affect corporate profits and economic growth. Changes in taxation, trade laws, and interest rates greatly impact the stock market’s performance.
• Geopolitical Risk: It refers to the hazards to the stock markets related to acts of terrorism and tension between two or more states that affect international relations. So, when investors learn about geopolitical risk, we move to safer assets. Because of this, the markets start declining. 
• Regulatory Changes: Sudden changes in regulations impact both industries and companies. During such changes, you will notice a high stock price fluctuation. As investors, we must understand how different industries and companies are affected by regulatory changes. Some key alterations in regulations that affect world indices are environmental, financial, and industry-specific regulations and tax reforms. 

Risk Management Strategies

As investors, we are very familiar with the word risk. We know that our investments are subject to risk even if they are safe assets like gold. So, what do we do? We take actions to reduce, avoid, transfer, or accept risk. These are known as Risk Management techniques.

Let us look at a few strategies to manage risk influenced by political events.

• Risk Assessment: It is the process of understanding what probable impact political events may have on different industries and companies. It helps us make informed investment decisions and understand how to reduce or completely avoid the risk.
• Diversification of Portfolio: This refers to the financial strategy of investing across various asset classes or securities to reduce risk. It is one of the most followed risk management strategies by investors. You should also follow this as it will reduce your risk during political turmoil and increase the likelihood of stable returns.
• Hedging is a risk management technique in which you reduce the risk of losing an existing position by buying or selling an investment. It is also defined as controlling or limiting a loss or risk. However, you should remember that hedging is a very advanced risk management technique and requires a lot of knowledge about the process before implementing this risk management strategy. 
• Long-Term Perspective: It is a very simple technique of risk management. Having a long-term perspective will help you to withstand the political storm. With a short-term perspective, you are bound to lose money. 
• Staying Informed: Keeping up-to-date with all the political developments will help us understand their implications for the stock market and make sound investment decisions. You can stay informed by following the world stock markets’ live indices, as it will show you how geopolitical events affect the stock markets worldwide.  

Conclusion

The relationship between politics and global stock market indices is not straightforward but is complex and influenced by multiple factors. Political events like elections, policy changes, and geopolitical crises significantly affect world indices. They facilitate market volatility and affect the overall economic condition. We must understand how political events shape the global marketplace and how we can profit from them or reduce our chances of losing money.