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Recessions Because Of change In Stock Prices

By Anonymous

The financial system and the stock market are intimately related. Many people look at the stock market to find out how the financial system is doing. It's long been well-known that if the stock market is in a era of decline, the economy is confident to follow. On the other hand there is little evidence that the stock market affects the economy to rise or fall. The stock market does not unswerving affect the economy. It is just a mirror of people's usually correct beliefs about what is concerning to happen in the economy. The most excellent way to understand this is to comprehend that a stock market index the Dow Jones Industrial Average (DJI) is just a price. Since the value of index is a price, it only has two determinants which are respectively:  supply and demand.

Supply and demand
For most goods if the supply rises in the short run then the cost of the good should decline. For instance, if the car companies unexpectedly doubled their supply of cars then we would suppose the price of cars to fall.

If we consider that changes in the supply of stocks are the major cause of stock market rises and declines then, consistent with this rule, when a company concerns new stock we would expect the cost of stock to turn down. If stock prices are mainly determined by the supply of stocks and the market refuses prior to an economic decline, we should perceive a flood of new stock issues before a recession. This does not occur in practice, as new stock issues are inclined to occur as the economy enters a development era. This is for the reason that the money made from a stock issue is used to enlarge the output of the company, which causes financial growth to rise.

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Resource article: http://www.expertsbuzz.com/

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