The stock market and the economy are often discussed simultaneously, giving the impression that they may be the same thing. so to be clear: the stock market is not the economy. Although the stock market and the economy are mostly moving in the same general direction over the long term, they are two completely different things.
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The stock market is where investors go online to buy and sell investments, most commonly stocks, which are shares owned in public companies. People often refer to one of the major stock market indices, such as the Dow Jones Industrial Average or the S&P 500, when talking about the stock market. That’s because it’s difficult to track each individual stock, and these indices are considered representative of the entire market.
The economy is the relationship between production and consumption activities that determine how resources are allocated. the production of goods and services is used to satisfy the needs of the people who consume them. Simply put, this is our economic system.
The stock market may be an indicator of the performance of the economy, but it is only an indicator. Simply put, the stock market and the economy are not the same thing.
a closer look at the stock market
in the early 1600s, countries like britain and holland needed a way to increase their bank accounts in order to progress as industrialized countries. the powers that be found companies that were doing well and made a deal with them to exchange some money for a small portion of their profits. To say that it went well is an understatement.
We’ve come a long way since the 17th century. In the United States, there are two stock exchanges that you are probably familiar with. The New York Stock Exchange dates back to 1792 and is the largest market for buying and selling stocks and bonds in the world. the nasdaq is a fully digital stock exchange where you can trade many big tech companies, like apple and facebook (plus some non-tech companies too).
since its beginnings here in the usa. In the US, the stock market has historically provided returns for its investors. Stock market returns vary widely from year to year and rarely fall into the average range, but that being said, over the last 100 years, the stock market’s average annual return is about 10%, before it was take into account inflation.
a closer look at the economy
See also : What to Do When the Stock Market Crashes
all that us the economy produces is measured by gross domestic product, or gdp. When the GDP growth rate turns negative, the economy enters a recession. when that recession lasts several quarters, it can be considered an official depression, which occurs by a secret committee.
GDP is one of the most common indicators used to track the health of the economy. represents the total dollar value of all goods and services produced during a specified period of time, often referred to as the size of the economy.
for stock prices to grow faster than gdp, either price has to grow faster than earnings or earnings have to grow faster than gdp.
Indicators of a strong economy are strong employment numbers, higher wages, higher retail sales, steady inflation, rising interest rates, more home sales, and an uptick in consumer goods manufacturing. Of these, the most important is consumer spending.
a growing economy can lead to a strong or bullish stock market. when businesses are doing well, a drop in unemployment will coincide with a rise in corporate profits and consumer spending will rise. people are working, earning money, spending more and saving more. on the other hand, a more passive, or bearish, market indicates a slowing economy with investor fear and pessimism.
how the stock market impacts the economy and vice versa
So, even though it’s often conflated with economics, the stock market is a different animal entirely. the stock market is driven by the emotions of investors, while the economy is the wealth and resources created in terms of production and consumption of goods and services. they often impact each other, but they are not the same.
The stock market affects the economy by influencing consumer confidence, which in turn influences the economy as a whole. the relationship also works the other way, in that economic conditions often affect stock markets.
understand how they work together
The stock market drives the economy in several ways, beyond acting as a symbiotic indicator. Stock purchases allow an individual investor to own part of a company. Thanks to the invention of stock markets, not only large investors and private equity institutions can benefit from the free market economy. Investing in the stock market can also help investors beat inflation over time. Remember that the market has historically returned about 10 percent to its investors over time—that’s a lot more than putting it away in a savings account. although it is also a good idea for emergencies and short-term goals. (And, of course, past performance doesn’t necessarily guarantee future results.)
Another way the economy and the stock market work together is by nurturing new businesses. Growth-oriented companies require capital to finance momentum, and the stock market is a major source. For this to happen, the owners sell part of the company and “go public” with an initial public offering (IPO) of the shares. An IPO brings in a lot of cash and can build general excitement around companies that are poised to grow in this way. Perhaps most importantly, it indicates that they are already profitable enough to afford the IPO process, which can cost millions.
When companies go public and enter the market, people get excited and buy shares, which finances growth on their part and bolsters confidence on ours.
invest in a volatile market or in a recession economy
Investing during a down market or recession can mean making different investment decisions. there are some options that are popular with investors in these conditions. top-tier stocks are one. Blue chip stocks are the big names that you know are probably going nowhere anytime soon. All of these stocks have a few things in common: strong cash flows and solid finances. they are stocks you can own and sleep soundly at night, regardless of the ups and downs of the market. Keep in mind that blue-chip companies typically trade some growth potential for greater predictability and dividend income, but that’s what many people are looking for in a down market.
You can find several top-tier entries on the topic of dairy cows from the public. McDonald’s, Wells Fargo and Ishares US Financial Services ETF are examples of blue chip holdings.
Consumer staples could be another good option. Examples of consumer staples include food, medicine, beverages, tobacco, and household staples. These are things that people are unlikely to cut back on in tough times because people see them as basic necessities. Businesses that fit this category are woven into nearly every public issue, from click to send to health and wellness.
the end result
Although the stock market and the economy, often combined, are very different things, they impact each other. Understanding both, and how they mirror each other’s ups and downs, is key to establishing a holistic approach to investing and finance. dollar cost averaging is a useful tool for staying accountable no matter how the market is performing and smoothing out the ups and downs over time.