Stock markets and economy share a close relationship. Movement in the stock market profoundly impacts the economy, investors, and individuals in general. The way the stock market performs reflects the overall mood of the economy and the public. Read on to learn the impact of stock market on the Indian economy as a whole.
The increase or decrease of share prices can influence business and consumer confidence, which, in turn, can have a positive or negative impact on the economy. At the same time, economic growth and other conditions can affect stock markets as well. Here’s how stock market affects economy:
Stock markets are volatile. The price of any share rises and falls on a constant basis, making markets volatile. In the event of a bull market, the stock market performs well and is generally on the rise. This rise reflects confidence among investors and individuals, and they become more optimistic about markets.
On the other hand, consumers become pessimistic during a stock market crash. It creates a sense of panic, and most investors tend to withdraw from markets, and it depresses the economy.
In a bull market, people become more confident and increase their investments. This drives overall consumption and has a positive influence on the economy. People also tend to increase their investments in market-linked products that help them get inflation-beating returns in the long term.
However, a bear market hurts consumption and negatively impacts economic growth. As investors are in a state of panic, they think twice before investing, which retards growth.
Businesses play a key role in economic growth, and stock market performance also influences the business environment. When the stock market performs well, businesses are more likely to raise capital that can fuel their growth and enhance value.
On the other hand, when markets are down, the confidence of businesses also takes a beating. They are unwilling to spend, which negatively impacts goods and services and gross domestic product.
When markets rally and stock market indices go up by at least 20% from the recent low, markets are said to be in a bull run. In a bull market, stock prices go up, and investors become optimistic. Here’s how a bull market affects the economy.
In a bull market, investors’ confidence in the economy rises. As they are more optimistic about growth prospects, they engage in more investments and expenditures. This increases consumer spending and positively impacts the gross domestic product. Note that consumer spending is a major component of GDP, and its rise augurs well for the economy as a whole.
As investors have a positive sentiment in a bull run, they pump more money into the economy by making various investments. This propels the economy and makes it more robust. It not only attracts domestic inflows but also funds from foreign investors, which positively affects the economy.
Businesses have a profound impact on the economy. Their growth aids economic growth. In a bull run, enterprises can easily raise capital through IPOs as investors’ confidence is high. They can deploy the funds to strengthen their bottom lines, which ultimately enhances revenues for the Government. The economy ultimately benefits.
When market indices fall by more than 20%, markets are said to be in a bear phase. A bear market also affects the economy. How? Let’s find out.
The economy retards when markets are in a bear phase. This is because this is the time when investors and individuals are nervous, and they don’t want to invest money. This reduces consumption and drags down the economy. Also, in a bear phase, people tend to invest in low-risk assets that further drag down the economy.
In a bear market, there is a fall in the investment portfolio of investors. Because of this, there is a decreased spending on goods and services. This has a negative impact on consumer spending and slows economic growth. Note that consumer spending is a vital component of gross domestic product and its slowdown directly affects the economy.
Note that stock markets and economy are two different things. However, the happenings in one have an impact on the other. The two are different in size, and various factors affect them. As an investor, you must look into the fundamentals of a stock before investing rather than looking at the economy.
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