The stock market affects individuals and businesses in an economy in many different ways. As per Kavan Choksi Finance Expert, the performance of the stock market may have a ripple effect on consumer spending and businesses. It can influence economic dynamics, confidence levels, and access to capital for both individuals and corporations.
Kavan Choksi Finance Expert discusses the impact of stock market performance on consumer spending and businesses
Very often, consumers tend to spend more during bull markets as they make more money due to the effects of a strong economy, and feel wealthier after seeing their portfolios rise in value. On the other hand, during bear markets, the economy is typically not doing well and hence the consumer spending goes down. A simultaneous fall in stock values even creates fear of the loss of wealth and purchasing power as the value of investments contracts.
A rising stock market is typically aligned with a growing economy and contributes to improved investor confidence. This confidence prompts higher buying activity, and can drive prices upward. As stock values rise, investors witness a growth in wealth, translating into increased consumer spending. Increased consumer confidence leads to a rise in the purchase of goods and services, encouraging businesses to boost production and sales, and resulting in augmented revenues. On the other hand, stock market downturns diminish wealth in personal and retirement portfolios. Individuals experiencing a decline in portfolio value often limit spending, particularly on non-essential items like luxury cars and entertainment, during financial uncertainties. This reduction in consumer spending impacts businesses in a negative manner.
The fluctuations in the stock market can impact businesses in a myriad of ways. The stock market’s fluctuations can impact companies in various ways. The rise or fall in share prices directly influences the market capitalization of a company and its overall market value. A higher share price enhances a company’s market value, while a lower one diminishes it. Market value becomes vital in merger and acquisition considerations, especially when shares are involved in the transaction.
Decisions in regard to share issuance are also influenced by stock performance. A company experiencing positive stock performance may be more inclined to issue additional shares, in order to raise capital at the heightened valuation. Companies should additionally average the costs of both their debt and equity capital when arriving at a weighted average cost of capital, which is used for multiple analysis scenarios. The higher the expected market performance, the higher the cost of equity capital will be. As the cost of equity capital goes up, present value calculations go down as companies must use a higher discounting rate.
As per Kavan Choksi Finance Expert, businesses have substantial capital investments in their stock which can lead to problems if the stock falls. Holdings in shares, whether as cash equivalents or for pension fund backing, can face devaluation during stock declines, potentially leading to funding issues. However, positive stock value increases can generate new interest in a company or sector, potentially contributing to revenue growth from increased sales or attracting new investors.
