How is finance and world economics tied to the stock market?

Comments

1. Cthulhu fhtagn! says:

   February 26, 2010 at 8:07 am

   Stock market is part of finance industry.

   Finance industry connects people who want to save money (retirement accounts, certificates of deposit, buying stocks) to those who need money (home and auto loans, corporate and government bonds, companies issuing shares)

   Stock & other financial markets channel the saved capital to whatever investment offers highest return (stock growth, interest on bonds, etc). It might mean shifting money between stocks or bonds when interest rates change, or it might mean shifting money between US and Europe depending on who has better growth prospects.

   Now if you want to invest into Europe, you need to buy Euros, which means you enter currency market where US$ is traded for Euros. So if all else stays same, when US stocks go up US$ should get stronger as everybody is shifting their investments from Europe to US.

   But unfortunately, all else does not stay same. Importers and exporters also participate in currency exchange. If US buys more exports, they sell dollars to buy foreign currency to pay for them, and which drives dollar down. Finally, there are speculators, who use financial markets to bet on currencies going up or down, and unfortunately just placing these bets does change where the market is going.

   So currency market movements reflect three things:
   - How well stocks & other financial markets are doing
   - How much import & export is going on between countries
   - Speculators expectations about currency

   There is plenty more going on, eg.:
   stock growth depends on growth of entire economy,
   economy gets better when exports increase,
   exports increase when currency gets weaker,
   but weak currency decreases stock growth

   I know it’s complicated, so you should not feel bad about getting confused. Plenty of Economics Nobel Prizes were given for just trying to figure this out.
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