Corporations need a steady stream of income. Rather than apply for a bank loan, a company might issue stock and acquire funds from investors. The stock market is an electronic marketplace where corporations and investors buy and sell stock. Stock prices reflect the current state of the stock market and the global economy, and fluctuating stock prices can have a significant effect on society.
Factors That Affect the Stock Market
Economic conditions and world events have a major impact on the price of stock and can influence the stock market for better or worse. The U.S. Federal Reserve may respond to these events by increasing the federal fund rate, causing banks to pay a higher rate to borrow funds. Banks then charge higher rates for auto loans, home loans and credit cards. As interest rates increase, consumers typically respond by cutting their spending. Company revenues drop on news of lower consumer spending, which causes the company's stock price to drop. Likewise, inflation can have a powerful effect on the stock market. Inflation refers to an increase in the price of products or goods. Consumers are apt to spend less as prices soar, which impacts a company's profit and causes its stock price to decline.
Pensions and Retirement
Many corporations offer employees a retirement plan, such as a 401k or pension plan. Although employees might not invest in the stock market themselves, corporations typically invest pension fund holdings in the market to grow the pool of funds. Stock market fluctuations greatly affect retirement and pension accounts. If the stock market performs well, retirement accounts grow. But when the market performs poorly, retirement and pension values can decrease sharply and impact retirees.
Investors lose faith when the stock market performs poorly. Some people sell their company shares, fearing the loss of their savings. Likewise, new investors looking to increase their net worth might choose other investment strategies and avoid the stock market altogether. A mass selling of shares and a decrease in the trading volume can cause stock prices to fall even more. This creates a ripple effect and companies that rely on investor support could fail, prompting massive layoffs.
Just as a downturn in the stock market negatively impacts society, as conditions improve, the stock market recovers and stock prices rise. A well-performing stock market increases wealth for individual investors and corporations. This increased wealth leads to renewed consumer spending and pumps more money into the economy. Retail and home sales increase, and more people have more money to spend on entertainment and leisure activities. As companies in these sectors see increased revenues and profits, their stock prices increase.