Stock Market Explanation

Readers Question: How does Global Economy Depend on Stock Market?

The stock market is often a reflection of what is happening in the economy. The stock market does have an impact on the economy, but, it is only one of many factors.

If the economy goes into recession or if there is a period of financial uncertainty then stock markets will generally fall reflecting the negative economic news.

In turn a falling stock market can impact the economy.

  • Falling share prices decreases the wealth of some consumers. This decrease in wealth may lead to fall in spending.
  • Falling share prices make it more difficult for firms to raise money on the stock markets, limiting investment.
  • In extreme cases, fall in share prices may be so severe they can negatively impact on confidence.

However, the effect is limited as most consumers don’t own shares or their consumption is not directly tied to share values.

The recent stock market crashes were caused by the lack of confidence in the economy and financial system. Rather than falling shares causing a fall in confidence.

Leading stock market indexes like the FTSE-100 and Dow Jones are important in the sense that it gives an indication of the health of the biggest economies. Rising shares are a good sign, falling shares a bad sign, but in the short term, a lot of price movements can be due to speculation.

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