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What Are Stocks and What is Their Effect on the Economy?

Stock-Markets / Financial Markets 2020 Jun 19, 2020 - 08:18 AM GMT

By: Submissions


In layman’s terms, a stock is a tool for making wealth. A stock is a form of investment where  you buy a share or a part of the company issuing the stock.

Stocks make it possible for ordinary people to invest in successful companies. Alternatively, companies use stocks to raise capital to support growth and new product development.

Getting started in stock trading is a challenge for investors in the budding stage of their investment journey. Fortunately, Admiral Markets has adequate information and a forex demo to guide you.

Characteristics of Stocks

Stock appreciates

The price of a stock goes up, but it also goes down. As an investor, your goal for buying stock is to sell them for a profit, but making losses is inevitable in stock trading. 

Stock generates dividends

Many stocks pay dividends, usually paid quarterly. The approximate annual stock return is 10% but falls to 7-8% after inflation. $1,000 investment in stocks will be worth $8,000 in the next three decades.

How to Buy Stocks

Companies that want to raise money sell their shares in the stock market. Countries have their stock exchange to enable stock trading for local and global companies. 

The forces of supply and demand define the stock price. Tracking the stock performance for each company is hard, which is why you must keep up with the stock indices.

You can buy and sell shares for companies listed in the stock exchange. You will buy from another investor who wants to sell the stock, but not directly from the company. The transaction is conducted through the stock exchange with brokers that represent the investors.

Technology has simplified stock trading. Online stockbrokers connect buyers and sellers easily through their trading platforms. Buyers must open a brokerage account to connect them to the stock market to buy stocks. 

Effect of Stocks on the Economy

The stock market has various implications for the economy. The increase and decrease in stock prices have positive and negative effects on the economy.

 Stock prices not only determine the company’s revenue but consumer and investor confidence in the economy. Stocks have a symbiotic relationship with the economy as they both influence each other.

Here are some of the ways in which stocks affect the economy:

Stock prices trend

The stock market is dynamic. Prices can go up or down, and when prices go up (bull markets), it creates confidence that the economy is on a growth trajectory.

When stock prices increase, more investors are likely to invest in stocks. 

Alternatively, when stock prices fall (bear markets), the confidence in the stock market also falls. 

Investors are discouraged from investing in the stock market, and investors often divert their resources to low-risk investments.

Effect on Consumption

The stock market affects how you spend your money. A bull market is often characterized by more spending.

You are more likely to buy expensive items such as houses and cars when the stock market is on the rise.

A bull market brings a wealth effect associated with changes in personal spending habits leading to economic growth.

On the other hand, when stock prices fall, there is increased uncertainty among consumers. 

Investment declines, and so does consumer spending on goods and services. The economic growth reduces.

Impact on Business Investment

High stock prices encourage investment because of higher market values and returns. 

Companies often issue IPOs when the stock prices are on an upward trajectory, which will motivate investors to buy shares. Increasing investment fuels economic growth.

A bear market has the opposite effect on business investment and economic growth. When the confidence in the economy decreases, investors and businesses hold on as companies do not want to sell shares when the prices are down.

Final Thoughts on Stocks and their Effect on the Economy

The stock market is a crucial aspect of the economy. Stocks are ownership in a company that attracts profit/dividend after a certain period.

Owning stocks is easy, but investors must be aware of the constant changes in the stock markets. Most importantly, stocks have a significant influence on the economy. The movement in stock prices determines investment and consumption.

By Andrew Cioffi

© 2020 Copyright Andrew Cioffi - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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