The stock market affects individual businesses by influencing consumer spending and providing the chance for stronger returns on capital costs. Consumers spend more during bull markets because they feel wealthier when they see their portfolios rise in value. During bear markets, they pull back on spending, fearing an erosion of wealth and purchasing power as the value of their investments contracts. A rising stock market also increases the value of stock as a currency, enabling a business to raise more capital by issuing shares or even to use stock as leverage to acquire competitors.
Defined as the market in which ownership shares of businesses are bought and sold, the stock market is a valuable tool for gauging the health of the overall economy, though it occasionally misleads. A quip among economists is that the stock market has correctly predicted 15 of the last three recessions. Steep stock market declines preceded the Great Depression in the 1930s as well as the Great Recession of 2007-2009. However, some market crashes , most famously the Black Monday crash in 1987, were not accompanied by recessions.
The stock market measures the aggregate value of publicly traded companies. A rising stock market signals investor confidence, as buying activity pushes up prices. When stocks rise, people who have stock investments gain wealth. Increased wealth often leads to increased spending, as consumers buy more goods and services when they're confident they are in a financial position to do so. When consumers buy more, businesses that sell those goods and services benefit in the form of increased revenues.
Stock market losses cause wealth erosion. A consumer who sees his portfolio drop in value is likely to spend less. This reduction in spending negatively affects businesses, particularly ones that sell non-necessity goods, such as luxury cars and entertainment products, that customers can live without when money is tight.
Businesses also grow by investing in themselves. To invest in itself, a business needs capital. One of the most effective ways to raise capital is to issue stock. Doing so generates more capital when the stock market is up. Potential investors exist in greater abundance, as more people put their money in stocks during bull markets. Prices are higher during a bull market, so a company can sell each share for more money.
Stock can also be used as currency when a business wishes to expand by purchasing one of its competitors. Consider a company in growth mode with a highly valued stock that wants to buy a struggling competitor. A portion of the agreed-upon purchase price may be rendered in stock, with the company being purchased considering it a good deal due to the health and strong outlook of the purchasing company.
The stock market affects individual businesses by influencing consumer spending and providing the chance for stronger returns on capital costs. Consumers spend more during bull markets because they feel wealthier when they see their portfolios rise in value.
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