Movements in the stock market can have a profound economic impact on the economy and individual consumers. Here you will find that how does stock market impact the average consumer as well as how does it affect the economy?
- Wealth effect
One of the commonly expected impacts is wealth effect where people with shares will see a fall in their wealth. The stock market will affect their financial outlook, if the fall is significant. However, if a person is losing money on shares then he will be more hesitant to spend money. As a consequence, this will contribute to a fall in consumer spending. Usually people who buy shares are rich and mentally they are prepared to lose money. Approximately 10% of households own shares – for the majority of consumers, they will not be directly affected by a fall in share prices. Hence, the wealth effect is more important in the housing market.
- Effect on pensions
Stock market affects anybody, who has a private pension or investment trust, if not directly then indirectly. The pension funds or the some part of it are invested in the stock market. Hence, when there is a serious and prolonged fall in share prices, there will be reduction in the value of pension funds. As a result, the future pension payouts will be lower. Pension funds can struggle to meet their promises, if the share prices fall too much. And if the share prices fall for a long time, then there is hundred percent sureties that the pension funds will get affected along with the future payouts. Thus, for this reason, households will have lower pension income and it may feel the need to save more in other terms.
As per the experts of money classic research, the falling share prices can hamper the ability of firm to raise finance on the stock market. All those firms, who were supposed to expand, will get a low-cost way of borrowing more money. As a result, with falling share prices it becomes much more difficult.
- Bond market
With the in the stock market, other investments attracts more attention of investors. Investors might move out of shares and invest in several government bonds or gold. At that time, investors may think that these investments offer a better return in times of uncertainty.