The economy and the stock market are the two hot topics that are always trending, no matter the situation. However, acknowledging the market indexes declining by around 30% within a month, a crucial question arises among the people to understand the effect of the stock market on the economy. This article is going to answer the same and also provide you with information on the effect of falling or rise in stock markets on the economy.
Why does the stock market exist?
A stock is a kind of security representing the ownership of an individual in a company, and the place where an investor buys or sells ownership of such stocks through the best trading app is called a stock market. It is crucial to trade stocks on a public exchange for economic growth as it allows the companies to raise capital through public funding, expand their business, or pay off debt.
The two main reasons for the existence of the stock market are– Firstly, a company gets the opportunity to raise capital, which is further used to expand and grow the business. For instance, if any company issues one crore shares which can be later sold at Rs.4 per share, it results in them raising four crore for the business.
What Is the stock market’s effect on the economy?
Numerous factors in the economy or affected by the increase and decrease in stock prices, such as consumers and retailers, and confidence which, can either positively or negatively impact the economy. Several other economic conditions can also get affected by the stock market. Some of how the stock market leaves an impact on the economy are-
- Stock market movements – the stock market attains a volatile character because of the movements in the individual prices of stocks. When the stock prices move up or down, then volatility leads to a positive or negative impact on businesses and consumers. In the event of a rise in the prices of stocks, or a bull market, the entire confidence in the economy rises. The people’s spending also increases as they get more Optimistic about the market. A huge percentage of investors also enter the market and start trading on the best share market app, which feeds into good economic development in the particular nation.
However, the falling prices of a stock for a longer period, also termed a bear market, has a negative impact on the economy. People become pessimistic regarding the economic conditions and news reports on the stock prices falling, which often creates a sense of panic in the investors. Only a few investors step into the market and invest in lower-risk assets with their brokerage account, which results in the further depressing state of the economy.
- Wealth and consumption effect – when the price of a stock rises, and it’s a bull market, people get more confident in the market conditions and increase their investment. They start spending more on expensive items. This is also called the wealth effect, which means how a person’s income affects spending and leads to economic growth.
A negative wealth effect enters the economy. In the case of a bear market, when the stock prices fall. An environment is created of uncertainty among the consumers and the decrease in the value of their investment portfolios, which results in lesser spending on goods and services. This negatively impacts economic growth, as the consumer’s spending Is a crucial component of the gross domestic product.
- The impact on business investment – Apart from consumer spending, business investment is also a key component of economic growth. When the prices of the stocks are high, businesses hold a good opportunity for making more capital investments due to high market values. Several companies issue an IPO during this period when the market is optimistic, and it is a good time to increase capital through the sale of shares.
Moreover, there are several acquisitions and mergers during a bull market, and firms use the value of the stock to purchase other companies. This increase in investment adds to greater economic growth. But when the stock market Prices are falling, it leads to an opposite effect on the economy and investment. Businesses lose confidence in the economy and are no longer excited to invest in the economy. With the decrease in share prices, it gets harder for companies to increase funding in the stock market.
The stock market and the economy are two completely different things. The stock market gains and an economy’s GDP are incompatible, and there is little comparison between the two. The difference in the size of these two markets is the crucial element for this discrepancy. The economy relies on millions of factors that can positively or negatively impact it. However, the stock market gets affected only by a single factor, the supply and demand of stocks.