Indicators of Economic Conditions
The Stock markets are indicators of the economic conditions prevalent in the country. Stock Markets directly reflect the purchasing power of the consumers. This may be true in case of developed nations. In developing economies majority of the population really do not understand what stock market is all about. Only a small percentage of people invest in stock markets. Even though there is only a small percentage involved, I believe that the wealth is concentrated in their hands. Their spending or investing activities is what reflects on the economy. Also, the economy of any nation cannot be viewed in isolation due to globalization and liberalization policies. The changes the global economic scenario is bound to affect all the nations be it developed or developing.
Business rise and fall
The Stock Markets performance directly impacts the businesses. When there is a rise in the stock market index, the demand for goods increases as people have more money in their hands and are willing to spend due to the favorable economic conditions. People who have invested in stocks and shares will be benefitted from the price increase of their stocks and will be willing to either re-invest the gains or spend it in the market. In either way, businesses are bound to gain from the consumer spending or investment.
When the markets are down, investors might feel they will lose their money. So they tend to sell their shares at lower rates fearing a further crash in the index. This will lead to conservative spending. They also tend to postpone/hold off any further investing activities until the markets gain back the pace. Thus the spending or investing activities will see a sharp decline causing a fall in the businesses as well.
Extent of impact
As discussed in the previous paragraphs, the stock markets do affect the businesses as they rise and fall, but the question is to what extent it will affect the businesses. It again depends on the business nature and size. If the business is run on share capital and has foreign investors, the impact would be immediate and in direct proportion to the changes in the stock market. If the business is run on a proprietary basis and on small scale then the impact would be less eventful.
Both stock markets and the businesses are inter-related and inter-dependent. Changes in one sector will create the effects in the other and vice versa.