There is a saying: stock markets have predicted 10 out of the last 3 recessions.
With plummeting share prices making headline news, it is worth considering the impact of the stock market on the economy. How much should we worry when share prices fall? How does it impact on the average consumer? and how does it affect the economy?
Economic Effects of the Stock Market
1. Wealth Effect
The first impact is that people with shares will see a fall in their wealth. If the fall is significant it will affect their financial outlook. If they are losing money on shares they will be more hesitant to spend money; this can contribute to a fall in consumer spending. However, the effect should not be given too much importance. Often people who buy shares are prepared to lose money; their spending patterns are usually independent of share prices, especially for short term losses.
2. Effect on Pensions
Anybody with a private pension or investment trust will be affected by the stock market, at least indirectly. Pension funds invest a significant part of their funds on the stock market. Therefore, if there is a serious fall in share prices, it reduces the value of pension funds. This means that future pension payouts will be lower. If share prices fall too much, pension funds can struggle to meet their promises. The important thing is the long term movements in the share prices. If share prices fall for a long time then it will definitely affect pension funds and future payouts.
3. Confidence
Often share price movements are reflections of what is happening in the economy. E.g. recent falls are based on fears of a US recession and global slowdown. However, the stock market itself can affect consumer confidence. Bad headlines of falling share prices are another factor which discourage people from spending. On its own it may not have much effect, but combined with falling house prices, share prices can be a discouraging factor.
4. Investment
Falling share prices can hamper firms ability to raise finance on the stock market. Firms who are expanding and wish to borrow often do so by issuing more shares – it provides a low cost way of borrowing more money. However, with falling share prices it becomes much more difficult.
As I said earlier there is an oft repeated quote saying the stock market has predicted 10 out of the last 3 recessions. The point is that falling stock markets do not necessarily predict the economic future. Share prices can fall without causing a downturn in the economy. For example, one thinks of the stock market crashes of October 1987; there wasn’t an obvious economic factor causing this share price fall. The major economies remained relatively unaffected by this stock market crash. In fact, the UK had record growth in the late 1980s. This time the stock market fall is due to economic weaknesses so is a better guide to future economic performance.
5. Bond Market
A fall in the stock market makes other investments more attractive. People may move out of shares and into government bonds or gold. These investments offer a better return in times of uncertainty. Though sometimes the stock market could be falling over concerns in government bond markets (e.g. Euro fiscal crisis)
if you really know or knowledgeably enough on how to invest in the different market,you dont have to worry, you push your money to the fullest and high ROI. Big players in the marketsas wellas other investors are make there moneybut one thing dont sell your securities immediately hold it for a long time and sell it, its because evry now and then prices are increases.
oh my god stock xchng effect to much.astonishing
Thank You Why are financial markets important to the health
I want to know the basic principle behind the working of hare market? What is the profit, company is getting from shares? Does the downfall in share price affect the overall performance of the company?
how does it effect
it doesnt
I’m confused. Whatever people are doing now, you are doing it wrong! All people talk about is how the econmy sucks, soooo change it.
Goodbye
I think that wealth effect and the condfidence are the most important currently.
Stock market is having quite a lot of effect of economy and its reversal is also try.
Right now I am just a beginner and learning this stuff..
has bush or any one else has anything to do with the economic crisis.kindly answer iam quite new to this and i want to become an entrepreneur U R suggestions about what should i do are most awaited n welcome
Why are financial markets important to the health
of an economy?
exactly this How Does the Stock Market Effect The Economy? | Economics Blog is really nice.
I came through one more source2update.com
exactly this How Does the Stock Market Effect The Economy? | Economics Blog is really nice.
I came through one more
The stock maket is a tasty way to get your hands on some money however when the economy breaks down. Everybody looses there way and panics. for example. If the was a large shortage in chickens everyone would panic becuase chickens are loved by most people as is money
Stock market has a big effect on our economy. Stock market shows the gross national product of a country. That’s how important a stock is in the economy.
how does consumers affect the market economy?
i love the stock market lets mess up this world even more than bush did!!!!
I don’t get how these are essays!
“There is a saying: stock markets have predicted 10 out of the last 3 recessions.”
That does not make sense – how can you predict 10 out of 3? Did you mean 3 out of 10?
Any way scare mongering can affect the ecomony but the average Joe Smuch just heres about it but carries on as normal.