Unit 1
Unit 2
Economic Markets
The Stock Market
By now you will understand that if there is a price attached, we can use the forces of supply and demand to help us to understand why values have changed, and how they might change in the future. All over the world, millions of economists have been employed to try and use their skills to predict how the stock market (or “sharemarket”) will move. When share values increase, those who hold shares will be wealthier. On the other hand, when share values fall, people and businesses holding shares will experience a decrease in their wealth. The goal of all investors is to “buy low and sell high”, and it is an economist’s job to try and make this possible.
A “share” is part ownership of a company. If a company is broken down into 100 shares, and you own ten of them, then you own 10% of that company. Of course, this example has been vastly over-simplified; companies listed on the Australian stock exchange are typically broken down into many millions of shares. The value of a share will increase when the demand increases, or when the supply is restricted.
We are all potential share owners, and some people might own shares without realising that they do. If you have ever worked for a full week, it is possible that you have accumulated some superannuation. Companies in this industry tend to invest this money on your behalf, and often this investment is in the sharemarket. Even though retirement might seem like it is a long time to wait, the performance of the sharemarket today is affecting your standard of living in the future.
Demand for shares can be created in a number of ways. When the economy is performing well, businesses will usually be more profitable. This is because when people have jobs they will be receiving an income, and this will mean that they have money to spend. Profitable businesses will have more money to distribute as dividends, and so more people will be willing to invest money by purchasing shares in their company. This will create demand for the shares, and the price will increase. It is also possible for companies to artificially create demand for their shares. For example, a company can initiate a share buy-back. When this happens, the company is effectively offering to buy some of their own shares at a certain price. After the transaction has occurred, the supply of shares on the market will be lower. This helps to ensure that the price of the remaining shares will remain at the higher price.
It is important to understand that the sharemarket, like all investment types, can link to two other very important economic concepts. Soon you will learn a lot more about income and wealth. Income is money that is received on a regular basis. When you own shares, the profits are distributed as dividends. Normally this will happen once a year, although it is very common for businesses to issue an interim-dividend (which means a dividend that is paid before the end of the financial year). This type of income is known as factor income – income that has been earned through the use of a factor of production. In this way, shares can help you to increase your overall level of income.
However, shares can also help you to become wealthy. Wealth is made up of accumulated financial holdings. For example, a person who owns several houses in an expensive suburb would be considered wealthy, even if they didn’t currently have an income. On the other hand, we might think of a person earning one million dollars a year as “rich”, but unless they use this money to build up their asset base it is unlikely that an economist would classify them as “wealthy”.
When share holders receive a dividend, it is adding to their income. When the value of a share increases, people who own some of those shares are experiencing an increase in their wealth. With the possibility of increasing both with one investment, it is not surprising that economists are in high demand to try and analyse likely future movements in this market. (And that also helps to explain why good economists can earn a lot of money!)
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