Ever since the price of crude oil began growing there has been talk about the price of oil affecting the share market as well as your investments. Now if you think about it logically it does sound like it would make an impact. If it costs a company more to run the company because oil prices are changing then it sounds like it would impact the share price. Same goes for the idea that people will be less or more likely top buy shares in a company which has something to do with oil. So for example would you invest in a company which sold hose sockets if you were in a draught? Nevertheless is this theory about crude oil price affecting the share market actually real?
The rational behind this concept is that because many companies freight their items, they have to pay more to transport the products when price of oil goes up so does the transportation cost. This of course drives up the cost of the product. So if the company wants to keep the cost of their product at the same level, there will probably be less company revenue and the share prices will go down after that. Makes sense right? Well perhaps not!
Businesses do have a tendency to put up the price of their services or products in the event the cost of providing it increases. So the profit margin will stay at roughly the same. However if the mood of the population, and particularly the stock market investor population, changes concerning the product the business may suffer.
Yes global events that impact the cost of products like oil (think about Hurricane Katrina) do affect the investment mood. When there is a massive climb or dip people and investment companies tend not to change their portfolio around too much. But nevertheless when something grows in price with time individuals is less likely to react. We all realize that the cost of oil is growing but it isn’t like when a main event occurs.
Straight after an event happens worry spreads just like wildfire. One person’s fear turns into the fear of an entire investment industry. So no one buys or trades, but you will find generally lots of people selling. So there’s no actual understanding of what’s going on. Once the environment calms down so does the market.
So yes in massive bombs the price of oil will impact the price of shares. But in a long term growth situation it will not matter. The cost of oil has almost quadrupled over the last five years. But has the price of shares?
Not really because oil has become an even more precious commodity individuals want it even more. And owning shares in an oil company will provide you with that piece of Texas gold that you have been yearning. So the cost of oil shares hasn’t really changed, and if it it has grown.
So if we know that market changes will affect the share price because of the mood of people purchasing and selling shares we can predict the change. In the event you feel a change in mood, it’s nearly certain that there will be change in market. Which means you can sell, but there also is a possibility the cost will raise again after too long.
