ECONOMICS STUDY CENTER, UNIVERSITY OF DHAKA
  • Home
  • About
  • Announcement
  • ESC BLOG
  • Publications
  • ESC Research Portal
  • News and Events
  • Book Archive
  • 3rd Bangladesh Economics Summit
  • 4th Bangladesh Economics Summit
  • 5th Bangladesh Economics Summit, 2024
  • Research
  • Executive Committee
  • Digital Library
  • ESC Hall of Fame
  • Monthly Digest
  • Fairwork Pledge Supporter
  • Contact

Effects of The Stock Market on the Real Economy

6/25/2018

16 Comments

 
Jinat Jahan Khan
Picture
Movements in the stock market have been found to have a major impact on the economy. Changes in share prices can directly affect the real economy. A fall in share prices can lead to an economic crisis. The stock market crash of 1929 which led to the great depression of the 1930s can be cited as an example in this regard. Also, the downfall in stock prices from 2008 to 2009 in the U.S and then subsequently in the whole west created rifts in the real economy which caused the long recession. 
Picture
​ However, the stock market doesn’t always work how we imagine. Sometimes daily movements in the share market have no observable impact on the economy. For instance, think about the stock market crash of 1987. The UK was in fear that the crash would ultimately cause a recession. So it cut interest rates, which surprisingly caused an economic boom. Even the collapse in share prices from 2000 to 2004 in the UK did not reflect any serious problem for its real economy. 

 There is a long-standing debate among economists about whether or not the stock markets influence the economy in real. Though there are many arguments on this topic, we can try to sum-up some effects of the stock market on the economy and individual study which conclude that the change in share prices always cannot be a key factor to judge the situation of the economy.
Some economic effects of the stock market:
  • Wealth effect:
The wealth effect is a behavioural economic theory which refers to the link between the level of personal wealth and people’s decisions, how much to spend or save on goods and services. During bull markets, they can see their portfolios rise in value which eventually induces them to spend. An increase in the market value of some assets such as gold, bonds, stocks, property induces a feeling of being ‘richer’ in their owners which often tends to encourage spending than saving. And they prefer to spend this money where there is a chance to generate more money. Hence, they find the stock market to be the best place for this purpose.
On the other hand, this increase in share prices indicates a bull stock market, it may not affect the whole economy much as only rich consumers can invest more in this situation. And even if there is a downfall in prices, they can bear short-term losses.
  • Effect on business investments:
Stock prices can also affect individual businesses by influencing consumers’ spending and providing the possibility for strong returns on capital costs. When businesses feel that investments can lead to rising market values such as during bull or rising markets, they want to make capital investments. Merger activity tends to increase during these bull markets as business companies can use stock as currency. New and small companies generally take advantage of market optimism to raise some capital investments by issuing shares or even to use stock as leverage to acquire competitors. On the contrary, the scenario during bear markets is simply different. In this situation, companies become less confident and they don’t want to take risks by investing in new infrastructure projects or expansion plans.
  • Pension of private sectors:
Private sector workers are not allowed pension at the time of retirement and so they can’t take the benefits of retirement which the government workers enjoy. There are many private pension funds which invest in the stock market. If luck is in their favour and the stock market is in a good situation, the value of pension funds can increase. Therefore, those people who don’t own any share can have some benefits in the stock market through these funds. However, if share prices fall too much, pension funds can struggle to meet their promises and so individuals with private pensions bear a loss.
  • Lack of understanding:
Sometimes the stock market brings bad luck for itself because of a fear of a recession or global slowdown which eventually affects consumer confidence. Bad headlines of falling share prices can discourage people from investing more. The stock market crash of 2008-2009 reflected the fall in confidence. The stock market would not have borne much loss, but as it combined with falling house prices, share prices became a discouraging factor for consumers.
  • Making other investments interesting:
If there is a fall in share prices and the decline prevails in the stock market for long, people become very reluctant to invest anymore. They find some better investment sectors such as the government bonds or gold. At times of uncertainty in the stock market, these bond markets offer a better return. However, at times bond markets are the reason for the fall in share prices.
 
Though stock markets have some effects on the individual consumers and businesses and as a whole of the economy, it’s not the only factor to affect the economy. Fiscal policy decisions can also be important factors. For instance, large budget deficits can eliminate government investments slow down the economy. Interest rates can also affect it because rising rates indicate higher borrowing costs, restraining economic growth. On the other hand, falling interest rates can stimulate the growth of the economy.
 
The stock market is sometimes very tricky and complicated. Though it is commonly believed that a rising or bull stock market is indicative of a progressive economy, it’s not always true. At times, any inverse situation can also occur. How the stock market influences the economy is a matter of concern after the reckless lending exploits of certain monetary institutions led to the economic recession that occurred just before the turn of the decade. However, the effects of stock on the real economy are still uncertain and need further comprehensive analysis.

Picture

​Jinat Jahan Khan

​Jinat is a 1st-year student at the Department of Economics. She is struggling with her hobbies and Economics and luck doesn’t seem much favourable to her

16 Comments
Mohammad Fahad Tanvir link
6/22/2022 02:37:46 pm

Experience world class online Stock Market brokerage services. The best share market stock brokerage and securities house in Bangladesh. We provide the best customer service with latest technologies and low commission rate.

Learn More: Dhaka Stock Exchange, Bangladesh Share Market. https://www.midwaybd.com/

Reply
Mohammad Fahad Tanvir link
6/22/2022 02:41:11 pm

This blog are very helpful to gain good knowledge about stock market.
It is necessary to open a BO account in the stock market,
You can easily open a BO account at Midway Securities Ltd online at home.
You can know the details by clicking on the link: www.midwaybd.com

Reply
PCS link
7/23/2022 01:39:57 am

Though there are many arguments on this topic, we can try to sum-up some effects of the stock market on the economy Thank you for making this such an awesome post!

Reply
Fahad Tanvir link
7/26/2022 05:36:47 pm

Experience world class online stock market brokerage service in Bangladesh. Midway Securities Ltd. is one of the oldest, most prominent and well recognized Securities Brokerage house in the dhaka stock exchange, providing client service with success since 1975. In recent times our company has grown into a promising name for innovative and multidimensional brokerage services, pioneering the age of full fledged online share trading. Helping you invest your money is a job we take very seriously.

Reply
Bishop Gold Group link
8/16/2022 03:26:06 am

I agree, by far Gold is still the best material investment you can have as of today. Cryptos and other digital commodities were in but I still belive that having something that you can hold for long time is still worth it.

Reply
mr brooks link
9/20/2022 10:48:55 pm

Excellent post. I LOVE this article! We are a team of expert designers who possess expertise in producing great quality bank statement PDF, bank statements PDF services, paystubs PDF, utility bills PDF and tax returns PDF using your provided documents or creating our own. Because we help our customers to use the bank statements PDF services for educations and entertainment purposes.
You can also get some professional help with Income Verification from this team via WhatsApp, Email, phone number. And please visit our site.

LiveChat:https://tawk.to/chat/5b056f7bd0f6723da57ecd06/default/?$_tawk_popout=true
Call / Message on WhatsApp : +1 914 274 8666
Contact: (+1) 914 302 9443
Email: [email protected]
Website: http://changingbankstatements.com

Reply
back office support link
9/29/2022 02:40:56 pm

At times of uncertainty in the stock market, these bond markets offer a better return. However, at times bond markets are the reason for the fall in share prices. Thank you for taking the time to write a great post!

Reply
Joseph Chapin link
11/1/2022 11:42:22 pm

And they prefer to spend this money where there is a chance to generate more money. Hence, they find the stock market to be the best place for this purpose. Thank you for taking the time to write a great post!

Reply
Ashish link
1/30/2023 11:07:55 pm

Hey,

This article has beautifully displayed all sorts of sectors effectively which are driven by markets. Had great insights from this post.

Regards,
Ashish

Reply
Stock Trading link
10/12/2023 07:33:25 pm

Thanks for your post.
Our team of experts are trained to always put the interest of the client first. This has endeared us to many of our clients who trust us, you can also trust us too.

Reply
Stock Trading link
10/14/2023 08:18:53 pm


Thanks for your post.
Our team of experts are trained to always put the interest of the client first. This has endeared us to many of our clients who trust us, you can also trust us too.

Reply
Stock Trading link
2/16/2024 02:22:09 am


Thanks for your post.
Our team of experts are trained to always put the interest of the client first. This has endeared us to many of our clients who trust us, you can also trust us too.
and the best work done without any problems.

Reply
Stock Trading link
7/1/2024 01:32:44 am

Thanks for your post.
Our team of experts are trained to always put the interest of the client first. This has endeared us to many of our clients who trust us, you can also trust us too.
and the best work done without any problems.

Reply
Stock Trading link
7/2/2024 12:40:22 am

Thanks for your post.
Our team of experts are trained to always put the interest of the client first. This has endeared us to many of our clients who trust us, you can also trust us too.
and the best work done without any problems.

Reply
best indian stock market tips link
7/13/2024 01:21:10 pm

I found great pleasure in reading your thoughtful blog article. The views and concepts you expressed were tremendously useful.

Reply
gold IRA home storage link
1/30/2025 01:23:35 pm

"Gold IRA home storage allows individuals to hold their precious metals in their own possession, offering more control and security. However, it's crucial to be aware of IRS rules and risks, as improper storage could lead to penalties or disqualification of the IRA."

Reply



Leave a Reply.

    ​

    Archives

    February 2025
    December 2024
    March 2023
    January 2023
    November 2022
    October 2022
    August 2022
    July 2022
    June 2022
    May 2022
    April 2022
    March 2022
    February 2022
    January 2022
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    April 2018
    March 2018
    August 2016

    Send your articles to:
    [email protected]
Powered by Create your own unique website with customizable templates.
  • Home
  • About
  • Announcement
  • ESC BLOG
  • Publications
  • ESC Research Portal
  • News and Events
  • Book Archive
  • 3rd Bangladesh Economics Summit
  • 4th Bangladesh Economics Summit
  • 5th Bangladesh Economics Summit, 2024
  • Research
  • Executive Committee
  • Digital Library
  • ESC Hall of Fame
  • Monthly Digest
  • Fairwork Pledge Supporter
  • Contact