How the Current Stock Market Prices Affect Our Economy
A common saying among economists is that the stock market has predicted 10 of the last three recessions. When stocks fall considerably, the media begins to wonder about how the economy will respond. There are four primary ways that stock market prices affect the economy.
#1 Wealth Effect
When stocks start to fall, investors overall wealth will fall too. If the decline is severe enough, it starts to affect an investor’s financial outlook. When people start losing money in the stock market, they start spending less money. When people start spending less money, consumer confidence begins to fall as well. However, it’s not always the case. Many investors are prepared to lose money when they invest in the stock market. Their spending habits away from the market are usually independent of what’s going on with stock market prices. This is especially true for short-term losses.
#2 Effects on Pensions, 401Ks, and Annuities
Most pensions, 401Ks, and annuities invest some in the stock market and it’s usually a significant amount. Once the stock market prices begin to fall, it reduced the value of pension funds across the board. Unfortunately, this also means that the future payouts from these pension accounts will be lower. In some cases, should the market fall too far, then some pension accounts may not even begin to meet their obligations. Short-term market losses do not usually affect pensions to this extreme, but if prices are down for an extended period of time, the pensions can be significantly affected.
#3 Consumer Confidence
There are many times when the media’s impression of an upcoming recession will cause stock market prices to fall. When this happens, consumer confidence begins to fall and people start saving what money they have. This lower spending amount can sometimes cause minor recessions that may not have happened if the media hadn’t reported so much about the stock market prices, housing market problems, and unemployment.
#4 Investment
If companies are looking to expand their business operations and are issuing additional shares, falling stock market shares could hamper their ability to get the financing they need. It’s usually a cheaper way to get additional funds without having to borrow them. However, lower stock market prices may end up making it quite difficult.
Most economists will tell you that falling stock market prices do not always affect the economy. Some of the biggest declines in the market have cost investors millions of dollars, this loss doesn’t always trickle down to the general population.
There are so many factors that affect the market and the current economic situation is only one of them. Some of the other factors include quarterly reports, world news events, natural disasters, and a change in executives. When you’re looking to invest in the stock market, research about a company’s stock market prices is the best way to begin. It’s not an easy world to understand, but in order to make money investing, you have to start at the beginning.
Stock Market Prices Tip #1
Look at historical stock market prices for the company you want to invest in. While it’s not always a guarantee of future performance, it can give you a good idea of what happens during certain situations.
Stock Market Prices Tip #2
Everyone will tell you that they have a hot stock tip. Without doing some research ahead of time, you may be in for a shock when it doesn’t pan out. Don’t dump your money into someone’s gut feeling – unless it’s yours, too.
Stock Market Prices Tip #3
Stock market prices can change so quickly that it’s best to make sure your broker knows exactly what you want him to do in certain situations. Stock market prices, you could miss out on a big windfall otherwise.