You can say the stock market movements are a mirror to what’s going on globally, politically, and economically. When share prices drop, it can cause a complete economic collapse and vice versa. The stock market is not the economy itself, and its daily movement has less impact on the economy, but it is still vital.
We will see in the next few examples of how stocks affect the economy.
1. Effect on wealth
If something changes on the stock market, the first who will feel it are people who own shares. The money will either rise in their account, and their financial stability will be a bit shaken. That doesn’t mean they will lose a lot of money, since shareholders are usually wealthy people who are ready to lose money as much as they are to gain it. Maybe they will be more careful about further purchases and pause for a while, but considering that only 10% of households are also shareholders, they won’t be directly hurt by the fall of prices.
2. Pension fluctuations
If you have a private pension, you will probably be affected indirectly by the stock market. Wonder why? A significant amount of pension funds goes directly into the stock market itself (also indirectly). If there is a severe share price fall, it will lower the value of pension funds. That means future payout will be lower, therefore damaging the image of pension funds itself. In this situation, you have to look at the long-term movements. It’s not good if share prices fall for too long, because it can cause households to have a lower income and save more but not for the stock market purposes.
3. A ray of hope
Like we mentioned before, share price movements are a mirror of what is happening in the economy and the world. If there is a fear of a recession, like it is in 2020, it could shake the share prices and question every consumer’s confidence. Logically, people will spend less, but there were also cases wherein deep recession share prices rose and made people more optimistic about investing.
4. Investing itself – pros and cons
Falling share prices can hinder a company’s ability to raise finance on the stock market. Small companies that succeeded in getting into the market first and want to expand will have much more problems since they borrow by issuing more shares.
5. Trouble for one, an opportunity for other
A fall in shares of one company in the stock market will naturally make other investments more attractive. It can even prompt people to get out of their comfort zone and invest in something they usually wouldn’t. When things are uncertain, there is a chance for more significant earnings, ironically.
While people are not that much affected by the stock market in general, if you are a worker (especially for a big company), your status may change depending on the stock market state. Economy, politics. Everything influences our lives, especially nowadays, in the time of a pandemic. As we are approaching the recession, we will witness how the stock market will affect our lives further.