Is the COVID-19 Collapse Causing you to Distrust Stocks?
COVID-19 has been impacting a lot of people’s lives, but some people are wondering why we keep hearing about the stock market. People are losing their jobs, and people are dying, and all politicians want to talk about is the stock market? People are mad at stocks. But many Americans don’t actually understand the impact the stock market has on our lives. They just think rich people make money off of it, and regular people don’t.
If you are one of those people that is frustrated with politicians, and you do not understand their obsession with the stock market, stick around. I think I’ll have some answers for you.
Why do companies even have stock?
The reason companies issue stock is for one reason. They don’t have enough money. The leaders at the company have a great idea, and they want to introduce it to the world. One problem. They don’t have enough money to do it. It costs a lot of money to build a new building, hire new employees, and create a new product.
So what do they do?
They sell part of their company to finance it. If you have ever watched Shark Tank, contestants are essentially selling stocks to the sharks. But instead of the company asking Mark Cuban for money, they are asking investors in the stock market for their money.
If people decide to buy the stock, the company can now move forward on their project. The company wants to make sure the stock continues to increase in price because the next time they have a big idea, they will likely raise funds by selling more shares of their company.
That is the main reason companies care that their stock goes higher, it gives them more ability to finance those future projects.
What causes a stock’s price to change?
This is also pretty simple. The price of a stock is based on supply and demand.
If more people want to own shares in a company, than people are willing to sell their shares, the stock price goes up. If people are trying to sell their shares and nobody wants to buy them, the price goes down.
This is essentially the same thing that happens on eBay. When an item is popular, the bids go up and up. If an item isn’t popular, the seller will relist at a lower price.
The next question you are probably asking is, why would people even buy stocks, and what would make a stock that people want to buy versus one that people want to be miles away from?
Why do people want to buy stock?
There are two main reasons people buy stocks. Reason one, to make money. This is how most people view stocks. Just a way to make some cold hard cash. The second reason someone might want to buy a stock is to support the mission of the company.
But at the end of the day, to every investor, it doesn’t matter if you are buying the stock to make money or you are buying the stock to provide financial support as an investor you want growth. You want the company to either be growing its profits, its sales, or both.
If a company is increasing its profits, that means as an investor, you are entitled to more money. If a company has increased sales, that means its products are selling, its products are winning over market share.
Let me give you an example. So a company that a lot of people invest in to support the company’s mission is Beyond Meat. Based on traditional valuations, Beyond Meat is way overvalued. Meaning the fundamentals of the business do not deserve such a high stock price. However, investors are still buying the stock.
Why do people still buy Beyond Meat Stock?
Because they support the company’s mission, and the sales growth is off the charts. So much so they cannot keep up with demand. Luckily for them, their stock has been such a strong performer; they can sell more of their stock to investors to fund their increased production.
Why do politicians care about the stock market?
Going full circle to the intro. The reason so many politicians care about the stock market is because of the exact example I just mentioned above. The higher stock prices are, the more money companies have to finance future projects.
When companies can go after big projects, that has a considerable effect on the economy. It means new jobs and wage growth. The reason being is somebody has to build the building. Jobs. Somebody has to work on the new project. This means a company is either hiring someone unemployed or someone away from another job. This results in higher wages.
Take a look at the spiral effect that higher stock prices cause.
When people have more money in their pockets, they generally take that money and buy things. When people buy things, that means another company is going to have increased sales. When a company has increased sales, its stock goes up. When their shares go up they have more money to go after their new project. And the cycle repeats.
I know that was a lot, but I really hope it was informative. I am sure after reading that some people have more questions than when they first started reading.
But I hope now if you were frustrated or mad about people caring too much about the stock market, you now know why.
Let me quickly summarize the big takeaways from this article before you go off to the rest of your day.
Companies sell stock to raise money for future projects
Price of shares go up when there is investor demand
Investors demand stocks that demonstrate growth (to make money or support company mission)
High stock prices have a domino effect of economic growth
Thank you for reading this article if you have any additional questions, feel free to reach out to me at email@example.com!
About the Author
I am new to this whole blogging game. I write about topics that I find interesting, and that can provide value to my readers. The recent topics I have written about are finance, business trends, and some self-help. If you have any comments or questions around any of these topics, feel free to email me at firstname.lastname@example.org. And if you like the articles subscribe to my newsletter to get all my month’s articles in one email.