Whether there is a communication between the share price and economic stability? Financial investors daily buyand sell certificates of actions of thousands of corporations.
These corporations pay dividends, that is part of the profit, to holders of their actions. Share price of this company is defined by a ratio of demand for these actions and their offers.
Usually the prices of separate actions rise or fall depending on what profits are expected at each firm. Higher profits usually involve higher dividends for shares holders, and waiting for such dividends investors are ready to pay higher price for actions.
Fixedly watch share indexes and report about them in the press. The industrial index of Dow - Jones who represents average value of stock prices of 30 largest industrial companies of the USA concerns to them, for example. Quite often these average prices change over time and even sharply rise or fall within one day. So, in “ black Monday “ on October 19, 1987 falling of an index of Dow - Jones reached for day of record size - 20%. The share capital for the sum about 1 billion dollars evaporated in one day!
Sharp fall of exchange quotations in October, 1997 happened in response to prompt decrease in quotations in Hong Kong and in other exchange markets of Hugo - East Asia. Fluctuations of stock exchange bring up an important question: whether result the changes in price for actions in macroeconomic instability? Such communications between stock exchange and economy which could induce us to answer this question in the affirmative really exist.
We will consider sharp falling of share price. Having felt more poorly, shareholders can cut down the expenses on goods and services. And as issue of new stocks as a source of attraction of the capital in these conditions loses the attractiveness to firms, they can answer it with reduction of purchases of investment goods. However researchers found out that the changes in price for actions exert rather weak impact on consumption and investments.
Therefore though share indexes, certainly, influence the level of cumulative expenses, the stock market is not the main reason for recession or inflation. In this regard there is one more question. Even if the change of course of actions also does not lead to considerable changes of volume of internal production and price level whether it can warn about such changes? In other words, if the market value of the stock depends on estimated profits whether we can expect that prompt fluctuations of share indexes will predict to us changes of future economic environment?
Really, share prices often fall prior to recessions, and begin to grow prior to rises. For this reason share price is included in group of 10 variables making an index of the leading indicators. This index often furnishes the useful clue for definition of future direction of development of economy.
But the prices in itself on the stock exchange are not a reliable signal of changes in the volume of internal production. In certain cases sharp falling of share price was not followed by the subsequent recession in economy. “ Black Monday “ in itself did not cause recession within the next two years. In other cases recession began without preliminary falling of the prices on the stock exchange.]