How Do Stock Markets Affect the Economy?
Published / Last Updated on 02/03/2024
We have been asked many times how the stock market affects the economy and perhaps as many times how does the economy affect the stock market?
The fact that we can reverse question tells you that they are correlated i.e., they are directly related and affect each other.
What is the Stock Market?
A stock market is a listing of publicly available company shares. You are buying a share in companies. You are buying a share of their capital value; you are buying a share of future company profits.
Stock markets tend to fall into two categories.
- Internationally trading companies, larger companies such as those in the FTSE 100 and the Dow Jones that have significant internal earnings.
- Domestically trading companies, mid size companies such as those in the FTSE 250, FTSE 350 and S&P 500 that trade mainly in local, domestic markets but may also have some international trade.
Correlated?
- If the local economy is doing well, interest rates are low and consumer confidence is high, domestic trading companies will do well driving share prices up.
- If the global economy is doing well, internationally trading companies will do well driving share prices up.
- If your local currency is weak, then the UK’s larger, international companies that earn in $ or € will make more money when converting $/€ profits to £ sterling.
- If a company’s share price is high, it also means it can more easily raise capital for expansion or research and development.
- So, the economy affects the stock market.
Equally, when companies are doing well and making profits as well as creating employment opportunities, it also means:
- Lower levels of people claiming benefits meaning more money in the Treasury.
- More income taxes and national insurance contributions paid into the Treasury.
- More corporation taxes paid into the Treasury.
- With more money in the Treasury, in enables governments to stimulate the economy in many ways including infrastructure projects.
- So, companies and stock markets affect the economy too.
