Whilst the global stock market may not boast the universal appeal of the foreign exchange, this is a vast and influential space that has a marked impact on commerce and business operations.
To put this into context, the U.S. stock market is currently worth $34 trillion alone, compared with the rest of the world’s $44 trillion capitalisation.
But how exactly does the stock market impact on businesses, and are SMEs more susceptible to fluctuations in price and value.
Exploring the Intrinsic Link Between Stocks and the Economy
In simple terms, the stock market affects individual businesses in two basic ways; by influencing consumer spending and by creating an opportunity to achieve stronger returns on capital costs.
Even on a fundamental level, there’s an intrinsic link between these two entities, as the stock market is defined as a sector in which equity shares of individual businesses are bought and sold.
In this respect, the market measures the aggregate value of publicly traded companies, whilst also offering an insight into the overall health of the economy and the geopolitical factors that impact on companies.
To this end, stocks have accurately predicted the previous three global recessions, by pre-empting instances such as the collapse of the sub-prime housing market in the States back in 2008.
This type of understanding is crucial, particularly for novice traders who are looking to get to grips with various markets and hone their skills through a forex demo account.
How Individual Stock Market Factors Impact on Businesses?
From the perspective of consumer spending, households often take their cue from market sentiment and the actions of traders.
When the stock market is bullish, for example, traders see company values rise and their portfolios gain momentum. This creates positive sentiment and increased consumer spending, whereas the opposite trend takes hold when the market is bearish and undermined by volatility.
This can create a cycle of growth in the economy, as consumers continue to increase their spend and companies benefit from improved revenues and rising share values.
Now, whilst this arguably benefits larger companies the most, SMEs are able to ride the coat tails of this growth and evolve into increasingly seminal engines for economic expansion.
On another note, the movements and fluctuations in the stock market also impacts businesses in a more direct and noticeable way.
This occurs when price shifts and market trends affect a business’s share values, which often causes companies to respond by raising more capital. They achieve this by issuing additional shares or using this stock as leverage to acquire competitors, which can also improve market sentiment during a bearish period.
Once again, the issue of share values tends to be pertinent to larger corporations, but smaller firms that operate in the same sector as a particular company can also benefit from increased sentiment and greater capital investment.