The movement of the stock market is affected by various factors, including economic activities. It is considered one of the most advanced and sensitive indicators of the economy, which can reflect the impact of any positive or negative news in very advance. Traders or investors are well aware of such factors, hence they keep investing or trading based on such news or events happening in the economy.
However, ever you have thought about how the stock market affects the economy? Yes, the significant movement of the stock market in a particular direction has a substantial impact on the economy. Here we are going to discuss how does stock market affects the economy or businesses, and individuals.
Top 10 Stock Market Impacts on the Economy
1.Wealth of Investors
One of the most important impacts of the stock market movement on the economy is on its investors. The wealth of investors keeps increasing when the stock market moves in an upward direction. The people who have invested in the stocks with the expectation of increasing their wealth, but when the market falls, their wealth also goes down as per the movement in the stock prices.
Appreciations in the wealth of the investors help them earn profit from such investments and increase their spending, which directly or indirectly supports the corporate sector, hence driving the growth of the economy. A downward movement in the stock market reduces the value of wealth of the investors. And investors avoid investing in the bearish market, which has a negative impact on the economy too.
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Fundraising Activities
Companies raise funds through launching IPOs or FPOs to finance their ongoing or future projects, and when the market runs in the downward direction, they avoid raising funds by issuing the equity shares. Companies either issue shares at a very low price, which reduces their fund corpus or try another route like borrowings from banks and financial institutions, for which they have to pay interest.
Also Read: Benefits of Investing in the Stock Market: Advantages of Share Market
The funding activities of listed or new companies depend on the trend in the market. If the market trend is up and positive sentiment among the investors, the IPOs and FPOs are launching activities are high rate. While in a bearish market or a negative market sentiment, companies avoid raising funds by issuing shares or postponing their fundraising activities or prefer taking loans from banks.
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Domestic Investment
As we said, when the stock market movement is not in the positive direction, the corporates avoid raising funds through the equity market or hold their fund-raising activities. This will have an adverse impact on the company’s capex and investment plans, which creates more employment and business opportunities in the economy. This would have an adverse impact on investment activities by the corporate sector.
Low investment and capital expenditure activities by the companies in the economy also slow down the infrastructure development and capital formation in the country. The positive stock market trend has a positive impact on the investment activities of the industrial and corporate sectors. And this would have a positive impact on the overall growth of the economy.
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Foreign Investments
When stock market sentiment is positive in a country, not only the domestic investors but also foreign investors get attracted to such growth markets. And such investment in equities by foreign institutional investors (FIIs) not only boosts the stock market movement but also brings funds from the overseas market, and that is good for the economy in terms of foreign investment in the country.
Similarly, when the stock market sentiment is positive, the foreign direct investments (FDI) also increase, which helps the corporate sectors to raise funds through overseas investors. Though there are certain rules and regulations by the government on FDI, with restrictions on certain industries or sectors. But still, the stock market movement also affects the foreign investments in the country.
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Investors’ Sentiments
When the market runs with the uptrend or keeps moving in the upward direction, the sentiments of the investors are also in the positive zone. This not only attracts more investors to put their money in the market but also helps to boost the trading activities in the market that have a direct or indirect impact on the growth of the economy.
Also Read: Trading or Investing Which is Better and More Profitable
A positive sentiment among the investors attracts more investors, while a negative sentiment among the investors brings discouragement among the investors. This kind of positive and negative sentiment of the investors also has an adverse impact on the growth of the economy.
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Economic Sentiment
The stock market performances also influence the sentiment of the various economic activities in the country. A positive market sentiment in the market brings a smile on the face of the investors, and at the same time boosts their willingness and interest to invest or spend their money on various activities. While a negative sentiment in the market due to a bearish trend or downwards movement also discourages the sentiment of the various stakeholders in the economy, which can slowdown is growth.
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Banking & Financial Sector
When the stock market movement is bullish with positive sentiment among the traders as well, investors, it also brings positive factors for the banking and financial sectors. The fund transfer or investment activities start increasing, resulting in banks and financial companies getting more business and operational activities in their daily operations. Fund-raising companies hire merchant bankers and their banking partners to manage the funds on various such activities associated with the stock market, like IPOs, FPOs or investing.
High business generation for the baking and financial sector also brings a contribution to the growth of the economy. Hence, positive or negative stock market movement also has an impact on the financial sector or other related sectors of the economy.
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Impact on Intermediaries
The stock market is managed, regulated and operated through various intermediaries like regulatory authorities, banks, broking houses and custodial or clearing houses. And when the stock market moves with an uptrend or trades with positive sentiments, then a greater number of investors and traders become active. This brings more tasks and businesses for such intermediaries.
Government gets more taxes, banks get more commission on funds release or transfer, brokers earn more brokerage and clearing houses or custodians also get more maintenance charges on share pledging or transferring fees etc. Similarly, negative market sentiments have an adverse impact on the business of such intermediaries, as there is less trading volume in the market.
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Impact on the Bonds & Gold Markets
When the stock market crashes or there is a panic situation to liquidate the funds from the equity market as far as possible, it has an adverse impact on the bonds and precious metals market. When there is uncertainty or negative sentiment in the equity market, investors start shifting their investment from equity shares to more secure and stable instruments like bonds and gold or silver.
Also Read: Equity or Commodity which is better for Trading or more Profitable
There is an inverse relationship between the growth of the stock market and the bond or gold market. Gold has always been considered a safe haven for equity investors. While investors choose bonds to get assured returns with the highest security and predefined maturity period. And a change in the investment perspective between equity, gold and bonds has an impact on the economic growth.
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Valuation of Companies
It is well known, or you can say a natural phenomenon, that stock price movements have a direct impact on the valuation of the listed companies. When the entire market is trading with positive sentiment with an uptrend, the price of most stocks shoots up, resulting in the market value of listed companies also improving as per their market capitalisation, which makes the top companies become global players.
While the bearish sentiment or negative sentiment brings stock prices down, making the valuation of companies low. Such low valued companies are brink of acquisition or become the victim of a hostile takeover by various other large companies. More mergers and acquisitions take place, or there could be phase of consolidation in various sectors when valuations are at their lowest levels.
How Does the Stock Market Affect Businesses?
When the stock market crashes, it brings negative news for listed companies, as the market value of the companies decreases due to lower market capitalisation. While in mergers and acquisitions, for acquirers, it would be a positive factor, as it has to pay low price for the same acquisition.
Similarly, the fundraising plans by the companies are affected due to negative market sentiment, as they don’t get a positive response from the investors or get lower funds for issuing the same number of shares. However, a lower share price also brings an opportunity for the listed companies or their promoters and shareholders to buy back some of their shares at the lower price to increase their holdings in the company.
How does the Stock Market Affect Individuals?
Individuals who are interested in the stock market investment and trading activities are badly affected by the stock market movement. A positive market brings cheer to their face, providing the opportunity to keep investing and earning profits from the upward movement. As per the market movement, individuals determine their investment plans, which also affect the economic activities.
Also Read: Benefits of Investing in the Stock Market: Advantages of Share Market
Similarly, traders involved in the trading of stocks or various other market segments like futures and options also get the opportunity to trade in the volatile or uncertain market conditions. Some of them earn profits, while many of them incur huge losses, which affect their future trading activities or fund-related decisions. Hence, stock price movement also affects the individual’s investment decisions.
Summing-up
The stock market movement with a clear direction or trend also has an impact on various factors that can affect economic activities. A positive trend or bullish sentiment in the market also brings a smile not only on the face of the investors but also on the face of a cheering phase for the whole economy. While a negative sentiment or bearish sentiment means it is also negative for economic growth.
Also Read: Types of Risks Associated with Investing in the Stock Market
Though, the stock market direction is not predictable but with upwards movement with positive sentiment in the market, more investors invest in the market, more IPOs or FPOs are launched to raise funds, and more investment is made by domestic as well as foreign investors. Similarly, the participants get more business through an increase in daily operations, while the bonds and gold markets are adversely affected. And last but not the least, the value of listed companies affected as per the stock price movement.
