Explore how the stock market impacts business and how you can safeguard your company from stock market fluctuations.
The stock market is dynamic, and share prices keep fluctuating. The rise and fall in stock prices impact numerous economic factors like business investment and consumption. Business leaders, and small business owners, often get confused, wondering how the fluctuating stock market affects their company and how to address the issues, given the recent market volatility. Here, we will discuss how stock market fluctuations affect business and how you should deal with them.
Before we move on to the impact, let’s quickly talk about the stock market.
What is the Stock Market?
The stock market is the aggregator of buyers and sellers of stocks where the shares of companies and other financial instruments are traded, including bonds, currencies, and stocks. Shares are the most popular investments. Investors purchase these ownership units in a corporation to profit from future price increases or dividend payments from the business.
Businesses can raise money by selling their shares as well. A minimum amount of money, shareholders, and other standards must be met for a company to be able to trade on the stock market.
When does the Stock Market Fluctuate?
Stock market fluctuation works on the same formula; shares are determined by supply and demand. Prices increase when enough stock is not available to meet investor demand; they decrease when fewer investors are willing to purchase stock.
Why does the Stock Market Fluctuate?
In general, supply and demand drive changes in share prices. Several other factors affect them, including:
- Information: When trading stocks, buyers and sellers research the latest developments in a business. Their decision to buy or sell depends on how they interpret the facts. A company’s share price can instantly go high if it announces plans to grow worldwide, as investors may get interested in the company due to the possibility of increased earnings.
- Economy: A nation’s or region’s economy impacts share prices, specifically due to changes in interest rates and gross domestic product (GDP). Production-based companies see a great increase in investment and share demand as the GDP rises. An increase in interest rates forces businesses to borrow more money, which reduces their profit margins and devalues their stock.
- The Financial Well-Being of the Company: The listed companies must release their financial statements on time. As per the profit and loss of the companies reported in their statement, investors and stockholders make their decisions. Positive numbers in the results presentations might increase demand for shares and impact the share price.
- External Events: A company’s performance can significantly impact share demand based on perceptions of the company’s performance. Some other events that are not related to finance, like disasters, pandemics, and conflicts, make investors unsure about the risks to their money invested in the businesses and sectors they impact.
The Impact of the Stock Market on Businesses
The changes in the stock market can impact companies in different ways. A company’s market value increases with the price of its shares, and vice versa. When contemplating acquisitions or mergers that include shares as a transaction component, the company’s market value is significant.
Stock performance effectively influences decisions about the issuance of shares. A company is more likely to issue more shares if its stock is doing well because it believes it can raise more money at a higher price.
The stock market’s performance also impacts a company’s cost of capital. To calculate a weighted average cost of capital (WACC), used in various analysis scenarios, businesses should be equal to the expenses of their loan and equity capital. The cost of equity capital will increase with the predicted market performance. Because businesses should employ a larger discount rate, present value computations become less as the cost of equity capital increases.
While a short-term decline in the stock market does not affect businesses a lot,
Long-term falls in the stock market ruin small businesses. In such situations, customers leave their wallets and purses at home. How can we forget the fall in the stock market during 2008 and 2009? Small businesses went to the Great Recession. Even giant brands like General Motors, Wall Street, or AEI did not get relief. Most small startups became defunct companies that had lost customers, employees, and municipal tax income.
During the most recent extended market downturn, traditional lenders provided more money to small firms than there were declines in consumer demand. This gave rise to opportunities that still exist today for careful, data-driven lenders to provide access to operating cash and a better user experience than traditional banks were providing.
Retailers and restaurants are two of the best examples of small enterprises that heavily rely on consumer spending to make money. Long-term stock declines reduce household wealth and expectations of future wealth and cause consumers to cut back on discretionary spending, which may limit the possibility for several small firms to progress.
The effects of stock market fluctuations can be seen in B2B businesses since their clientele may avoid big purchases or expenditures. A contraction in the credit markets is another possible adverse effect of a prolonged decline in the equities market. Banks and other fixed-income institutional investors may choose to reduce their lending to small firms and alternative lenders who provide loans to small businesses if they think the economy will contract due to the decline in the equities market. Small enterprises may find it more costly to get new funding for expansion. Small business owners may face difficulties after a stock market decline, if they have a solid business plan and enough cash on hand, they should be able to take advantage of the upswing and come out stronger than before—something that has been the case since 2008. Many small businesses turn to non-traditional lenders in these hard times to recover and thrive.
How to Deal with Stock Market Fluctuations?
Maintain tight inventory control, be realistic, and build positive client connections. The user experience and operational quality will always prevail.
The first step to dealing with the negative effects of the stock market on your business is to transform your offering from a “nice to have” to an “I have to have this” niche!
For small firms aspiring to expand, building and sustaining a connection with a reliable funding source is a wise move. Data-driven, innovative alternative lenders will take the time to get to know potential small company borrowers so they are prepared to support them during the slowdown in revenue.
Business owners can avoid the need for expensive emergency borrowing by having extra cash on hand to handle stock market fluctuations or shifts in customer behavior.
Avoiding unnecessary fixed expenses or long-term contracts can enable business owners to quickly scale up or down their operations in reaction to market changes, while, some industries can achieve this more easily than others.
Businesses that offer their clients exceptional value through excellent service generally retain customers through any economic condition, even though some consumers may avoid particular purchases during uncertain market situations.
Customers and customer service should always come first in difficult times. When you care for your customers and strive to deliver the best, they always wish to stay connected with you.
So, these were the techniques by which businesses can handle market swings and keep growing despite the negative impacts of stock market fluctuations. Include these strategies in your business plan to ensure growth even when the stock market is fluctuating rapidly.
