How Does Stock Prices Affect the Economy of the Country
Changes in the equity markets affect the population as well as the economy. A huge collapse in the markets may have disastrous results as seen during the crash of 1929 in the USA leading to the Great Depression. However, daily changes in the stock market do not have such significant impacts.
Here are the five effects of stock price movements to the economy of a country –
1.Effect on Wealth
When share prices drop, investors see their wealth fall. In the case of a significant decline, they may hesitate to spend money, which reduces the consumer spending. However, investors must not give this too much importance because they are often willing to accept losing money, especially in the shorter period.
2.Investments
In a situation where the share prices are declining, companies may find it difficult to raise money through the equity markets. Often, organizations issue more shares when they want to raise money for expansion because it is a low-cost method to avail funds. However, with falling prices, raising money through this route may become difficult.
3.Consumer Confidence
Declining stock prices may reflect the economic environment, such as a global slowdown or recession. As a result, there may a decrease in the consumer confidence. The reduced share prices may prevent people from spending, which may further be a discouraging factor.
4.Bond Markets
Generally, other financial instruments may become more attractive when the stock markets’ decline. Investors may shift their investments from shares to other products, such as gold or government bonds. Such instruments are expected to deliver better returns during uncertain periods.
Individuals who do not invest in shares may not be affected by decreasing stock markets in the short term. However, regular workers may still be affected by such situations. Nonetheless, corporates rely on financial funding for their requirements, which is why the equity markets have a limited role in the determination of employment and investment in the economy.
