51. Do changes in Stock prices cause Recessions?

STOCK: at some point of time, every company needs to raise money. This is done through-

1. by borrowing the money.

2. by issuing shares of stock of the company.

When an individual owns a share of stock, he/she is a part owner in the company with a claim on every asset and every penny in earnings. In short, Stock can be explained as an instrument that signifies an ownership position in a particular firm.

RECESSION: it is a general slowdown in economic activity. During recession, gross domestic product, employment level, business profits, investment capacity, etc all falls and the unemployment level increases.

RELATION BETWEEN STOCKS & RECESSION:

In a country stock market and economy are closely related to each other. Many people are of the view that if the stock market is showing a downfall then there will be a downfall in the economy of the country also, but this is not true as there is no strong evidence to prove this. Stock market just demonstrates where the investors stand in the economy of a country. The basic rule in economics states that with the increase in supply the price decreases. eg- if the manufacturing of a product has increased then the price of that particular product will decrease. If we apply the same rule to the stock market, then the economy should fall but this is not seen in the economy and the new stocks are issued when the economy is growing. This is because when a company makes money from the stock market it uses that money to grow its business further. Hence the economy grows.

CONCLUSION:

The relation between the stock prices and the economy is not logical. In the general terms if Y happened before Z, we think that Y caused Z. The stock prices fall because the investors think that the economy may fall and therefore sells the stock. So it is not the economy which is affecting the stock prices or the stock prices that is affecting the economy. Investors usually depend on the macro-economic situations to buy or sell the stocks and the investors are right about the downfall in the economy. They apply this strategy in stock market before there is any visible downfall in the economy and this makes people think that recession is caused due to the change in stock prices.