How does budget affects markets?
General budgets in parliament are tabled every year. The first thing to portray the announcements of budget are stock markets.
Why stock markets reacts to budgets?
In Budget by finance ministers results of national economy are declared. For example GDP growth, Deficits etc. Finance minister also announces the various tax allowance, increase or decrease in tax rates etc.
The various fund allocations to different schemes are announced, for example Education, defence.
The taxes, funds affects the business of companies. Shares reacts to the effects that buisness of companies will have (Positive or negative).
Suppose government allocated certain funds for education sector, education companies will be in green. If funds are reduced for education sector, the companies operating in education sector will perform bad.
The FAQ is sumamrised well.
I would like to add some points to it.
The question can be answered by understanding, What the budget is all about?
A budget is a quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows. It expresses strategic plans of business units, organizations, activities or events in measurable terms. At general budget finance minister presents the economic picture of India. How the Indian economy has performed and what steps government will take to solve the economical problems.
Government also allocates the budgets for different industries and sectors. Companies which operates in those sectors reacts accordingly.
Rail budget indicates the future change in business of companies operating in railway supplies. General budget indicates the overall picture of companies operating in all sgements.
A general cut in tax rates pushes the market up. Cut in tax rates can push the market high becasue the effects that it will have are:
- Cut in tax rates (Slabs for Individuals) will result in more savings and people will spend more thus increasing the purchasing power of public.
- More spending means more business, more business means more profits for companies
- People will invest in stock markets and thus demand will increase, more demand will increase the prices of shares.