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How Does the Stock Market Affect the Economy?

How Does the Stock Market Affect the Economy

Economy and stock market are two different things, unlike unanimous misconception.

Owing to the pandemic, GDPs of the nations around the world faced decline.

As a result, investors have grown really conscious and worried about its impact on the stock market.

Similar suspicions arise when the market indices confront a steep drop in stock prices.

Stock market Vs. Economy

Stock market is an arena where the ownership of stocks of the companies are bought and sold.

The said market enables the firm to raise funds for its expansion and growth.

This way of accruing capital also provides and edge to the company since, it escapes high interests and acquiring debt.

Stock market helps in

Enabling minor investors to invest in the economy.

It helps in beating inflation.

Aids in expansion and growth of a business.

Economy, conversely, involves all the making and trading of valued commodities, often categorized into, services and goods.

 How the Stock Market impacts the Economy?

A bull market is noted to have accelerated the optimism and confidence of investors, which results in increased spending on stocks.

While bearly state of the stock market has incurred negative effects.

Now, as you know that a company raises funds via stock market.

If it is in good state, this implies more wealth for the company to flourish, while a bad state anticipates low capital for investing in the company and thus fewer chances of fruitful prospects.

Market volatility, i.e., rise and fall of stock prices can to much extent affect the economy, which we shall discuss further in the write-up.

Here are major ways in which stock market can affect the economy of a country.

Commotion of the Stock Market

Market volatility here is determined by the rise and fall of individual share prices. This undulation may impact the companies and consumers positively as well as negatively.

If during bull run, the stock prices increase, the general confidence of investors increase, and they are highly likely to spend more in the market. And hence, the company has more capital to feed its growth and contribute to GDP.

While during bearish slag in the market, the pessimism overtakes the investors and hence they hang themselves tight from doing any stock market investments. People, then, prefer low-risk assets, since the news of stumbling share prices injects a frisson of panic into them.

Now, this consequently depresses the economic conditions.

Stock market impact on bonds & pension funds

Pension funds invest a lion’s share of their capital into the stock market, and thus it is likely to affect them quite remarkably.

Lowered share prices are likely to decrease the fund value and thus influence the pensions in future.

Now, there are people whose expenses and monetary activities depend on the money from pension money.

Drop in its worth will also decrease their spending activities, which shall further have effect on economic growth.

However, bear market has positive repercussions on bonds & gold, and thus people look up to these assets.

These resources promise better returns and investments with lesser risks involved than stock market, to put into perspective.

Also Read: What Will Happen to Your Shares if a Company Goes Bankrupt?

Effect on business investment

During bull run, due to high stock prices and market values, businesses are promised increased investments.

The firms also attempt to release their IPO during such optimistic times, since it is a suitable time to raise funds.

Moreover, mergers and acquisition possibilities too increase and firms can barter their value to acquire other companies.

Now, during bearish market, diffidence in economy and businesses makes the investors hesitant to invest.

The stock prices decrease which results in inadequate capital raise, and thus companies find it difficult to put it to the progress.

Consumption & Wealth Effect

Mounting share prices boosts confidence of investors in the market, which motivates them to invest more.

This results in availability of more capital for the company, so it may grow.

Furthermore, in the times of bull market, folks have a tendency to spend more on expensive commodities, like cars, houses and so forth.

This is termed as wealth effect, which states that change in income of a person, influences the way people spend. The amped up consumption, results in more production and thus economic growth.

On the contrary, drooping market, as said earlier, pumps up pessimism, which hold investors from contributing capitals in stock market.

This implies low availability of funds for a company to work on its growth.

The bear market infuses a decrease in the portfolio value, which tones down the spending of money.

Further, the diffidence also leads to low consumption and hence less addition to economy of the country.

Effects of Stock Market crash on Economy

A robust stock market is also an indicator of economy, and if it crashes, the share prices are going to fall immensely.

Low stock prices imply lesser capitals for the company to invest in its growth and expansion.

In case, the price fall of stocks sustains for really long period, new businesses cannot manage funds for their regulation and establishment.

This would result in lessening of pension funds, decreased salaries of employees and so forth.

The crash is going to have a decisive impact on the economy of a country, that is, its GDP will experience a fall.

Remember, stock market plays a pivotal role in the economy and that does not make both synonymous.

Bottom Line

In this write-up, we walked you through the ways in which the stock market can affect the economy.

Further, differentiation between economy and stock market also entered the discussion.

We grasped how bull run, can increase investor’s confidence which encourages him/ her to invest and spend more.

Thus, leading to more spending and growth in the economy.

Contrarily, depressed market cautions the investors away from stock market instead they prefer gold, bonds, and other low-risk assets.

It results in low spending, of which unhappy GDP is a probable consequence.

Finally, Stock market and economy are two distinct subjects, though one impacts the other directly or indirectly.

Further Reading:

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