Monday the 5th of February was described as a blood bath for the US stock market. It quickly escalated and affected the world’s stock markets on Tuesday before bouncing back the following day. Cashflost describes what happened and explains the effect of a stock market fall.
Story highlights
- The London Stock Exchange is known as the FTSE
- The Dow Jones reported the US stock markets were down 1500 points in February.
- World-wide companies may borrow millions of dollars from the US
The Stock Market Fall
The world woke up to a morning of panic. Rows of red figures dominated their automatic quotation boards demonstrating an ever-increasing drop in value. The US stock markets had suffered a fall of 1500 points the day before, and that dramatic plunge took its toll on the world’s stock markets. Cashfloat, an online cash advance lender, explores all about stock markets and the stock market fall of late.
What is a stock market?
A stock market or exchange is where stock brokers and traders buy and sell shares of stocks and bonds of all the major companies in the country. It is both beneficial to the company and the shareholder. If the company needs to fund a new project, they have access to cash by offering shares in their business. The shareholders can benefit from the companies’ growth and quickly convert this into cash. They avoid the riskiness involved in starting a company but at the same time they gain from the profits. Previously, stocks were sold and bought on the floor of the stock exchange person-to-person. Now, almost all stock exchanges are done electronically.
What are the stock markets called around the world?
Many countries have their own stock exchange, for example; The London Stock Exchange is known as the FTSE. The US has 2; NASDAQ and the NYSE (New York Stock Exchange). The Dow Jones indexes the trade that goes on in these two stock exchanges. Other stock markets include Japan Exchange Group; Euronext; Deutsche Börse and Shanghai Stock Exchange.
Stock Market Fall: What has Happened?
In short, they fell dramatically, and it started in the US. After a wild day of trading in Wall Street comprising of a single fall of 4.6%. That escalated, so by the end of the trading day; the Dow Jones reported the US stock markets were down 1500 points. In the US, that is the worse fall in 6 years. If it continues this way, the world can be looking towards another financial crash.
Since it started in the US, around the world, other stock exchanges have been affected. Ultimately, it didn’t take long for the Asian and European stock exchanges to also report falls as investors dump their shares. It is still too early to say how long lasting the effect is despite bouncing back. It is essential to understand that a fall in the stock exchange does not mean a collapsed economy immediately.
What Caused the Stock Market Fall?
We can only speculate why the stock markets have fallen and stock market experts can only predict. But, on Friday the 2nd of February, The White House boasted of wage growth in the US. However, as wages grow faster, it leads to inflation, (which means more short term loans). The US federal reserves often increase interest rates in order to control inflation. This effects investments and retirement stocks. Hence, shareholders who invest want to sell off their shares.
A decline in US stock markets disturbs other stock markets around the world. This is because world-wide companies may borrow millions of dollars from the US. A weakening economy means that foreign traders get stung as they have a higher cost of servicing their debt. In contrast, a booming US economy allows the US to trade with countries and suck in imports making these countries richer and healthier stock exchanges.
Does the Stock Market Fall Affect Us?
First of all, when a stock market loses point, it does not necessarily stay that way. This past drop is an example of this.
If it does happen, don’t panic! When confidence in the economy falls, the more likely it will in actuality fall. Bad headlines cause panic and unease – people fear losing money and therefore spend less. Less consumer spending translates into a deteriorating economy. When the economy is bad, people tend to take out more payday loans with best interest rates.
A falling stock market does not immediately affect the economy. However, as investors withdraw from companies, this will have a long-term effect. People who give up investments may see a decrease in their wealth which affects their personal consumer spending. Less demand for an item results in rising costs. However, this only applies to the wealthy top 10% of the population in Britain.
Furthermore, as we already mentioned, retirement savings get disturbed. If share prices fall too much, it can have a long term effect on pension funds. These funds may not be able to keep to their original agreements with pensioners. The value of a pension will decrease or increase depending on the interest rates.
Conclusion
It is hard to say if this was a shock drop or it may translate to future stock market falls. Time will tell. What we do know is that the stock markets in the US have been steadily increasing in the last 5 years and this sudden drop may have just been a scare. When the stock markets are shaky in one country, it has a knock-on effect, but countries economies are not immediately affected. Find out more interesting money-related articles on our Cashfloat blog.
