There are billions of shares traded on stock markets such as the Nasdaq and NYSE every single day, and while it may appear that the price movements, purchases and selloffs only affect shareholders and investors, the impact can reverberate beyond exchanges to businesses and the wider economy.
Even if a company has not gone public with an IPO and made its market debut, the direction of the stock market can, for example, change its investment or growth plans or even its entire business model. This is because the stock market is a bellwether for economic confidence.
The link between stocks and the economy
When shares for big companies in a specific sector such as finance begin to fall, it can lead to uncertainty. When people are not sure about the future, they are less likely to commit to business investment, which can then lead to fewer jobs being created.
While the stock market is not inextricably linked with the economy, the two often run in tandem. Take the stock market crash of 2008 when the Dow Jones Industrial Average cratered after Lehman Brothers declared bankruptcy. This was a sign that a recession was on the horizon, and the next 12 months or so were incredibly difficult for businesses of all sizes in a range of industries.
When these shocks occur, the start-up or local shop owner loses out because consumer confidence also declines and people are less likely to spend money. This can lead to redundancies, closures, and bankruptcies.
On the flip side, a bull market, where share prices increase over a long period of time, typifies a favorable economy that can have a positive impact on local businesses, with high demand from consumers and a greater flow of money enabling them to put growth on the agenda and invest in new products and services.
Another reason why stock markets matter for all types of businesses is the fact that shares are used as an instrument for raising finance. For firms that want to expand, issuing more shares can raise cash quickly. It is a cost-effective way of borrowing money, and this can lead to new, cutting-edge tech advancements that can eventually benefit everyone.
Analyzing stock movements to inform decisions
Stock trends and the way that investors trade in shares can also be used as a signal about where a particular industry is heading in the future. While small business owners may not fully understand why Tesla, with its comparatively small revenues, commands a considerable share price, they do know that investors are banking on Elon Musk’s company being part of an all-electric vehicle future.
Business owners can use news tied to share prices to inform their own decision-making. Just recently, Tesla’s shares have become directly linked to bitcoin following the company’s $1.5bn investment in cryptocurrency.
Wedbush analyst Daniel Ives recently noted: “With Tesla diving into the deep end of the pool on bitcoin, Musk runs the risk that this sideshow can overshadow the fundamental EV (electric vehicle) vision in the near term for investors.”
This highlights how the stock market is more than just price movements and numbers. The rise of shares and the strength of stock markets are based on real-world events that all business owners should be taking notice of for their own planning and investments.
Investing in stocks and shares
Smaller business owners need to be creative with their revenue streams to diversify, ensure business continuity and support further growth. The stock market is a viable outlet for investment for those who want to use some company funds to trade shares and make money.
SMBs can buy stocks as a personal day trader would, and with the right strategy, it doesn’t need to be a major time investment, though there are tax considerations. By researching the best shares to buy, you can target stocks with lower price volatility that could potentially deliver gains in the long term.
There are a number of reasons why stocks matter to businesses regardless of whether they are currently trading on a stock market. The day-to-day movements and short-term and long-term trends can be analyzed and linked with economic and general news to gauge the broader direction of the economy and certain industries.
Stocks are also affected by the interest rate, which is set by the Federal Open Market Committee. When rates rise, it becomes more expensive for a business to borrow money, which can, in turn, affect earnings and revenue, and the ability to drive growth and support expansion.
The smaller business is affected by this either directly, or via the health of the economy and consumer confidence. To conclude, stocks feed into a cycle that is always impacting businesses in some way.