As we approach the close of 2022, prices and inflation have hit the roof. Many financial experts blame the recent inflation on the Covid – 19 Pandemic or the Russia – Ukraine war, but these are both recent events. What affects the economy? A country’s laws, natural resources, and technology? It’s never certain.
However, one area that most people ignore is the Stock market. There are a lot of similarities that exist between the stock market and the economy. This article will provide a brief but detailed explanation of the relationship between online stock trading and the economy. Hopefully, by the end of this article, you’ll understand their relationship.
What is Online Trading (Stock Trading)?
In simple terms, stock trading involves buying and selling a company’s shares to make more money as the company’s value increases. People who partake in such transactions are called traders, meaning “stock trading.”
Online trading is an electronic means of trading through an online platform like Finixio AI. It involves the use of software that can be used for financial transactions, including bonds, equities, commodity markets, etc.
Stock traders study the fluctuations of a company’s shares to spot or predict the movement of prices. Once they spot a potential rise or fall in the prices of shares, they take their trades. However, not all company shares can be traded in the stock market.
Before a company’s shares can be traded on the stock market, it must go public and provide investors with its IPO. Once the company goes public, its shares can be traded globally throughout the stock market.
Does Online Trading Affect The Economy?
The economy and the stock markets are both characterized by rising and falling prices. During inflation, stock prices experience a downturn, but stock prices shoot through the roof during an economic boom.
This doesn’t necessarily mean that online trading determines the state of an economy, but there are a couple of ways online trading affects the economy. Here are a few notable mentions:
1. Consumer Spending
The stock market and the economy are both characterized by price fluctuations. Consumers tend to spend more when prices and inflation rates are low in an economy. Similarly, in the stock market, traders often make more profit during a “bullish market.”
During bull markets, the economy is strongest. However, when there’s an economic recession, the economy slips into a “bear market.” At times like this, the prices of stocks are significantly reduced, which drives investors to sell their investment portfolios.
In summary, when the prices of stocks rise, the economy moves into the bullish market, which often leads to more investment and a higher consumer spending ability. Likewise, the economy slides into a bear market when stock prices crash. During a bearish market, traders don’t make much money; this can help reduce the spending ability of traders.
2. Business Activities
If the price of a company’s stock rises, the company’s net value increases simultaneously. The most successful companies, e.g., Fortune 100, have some of the highest stock prices on the global stock exchange.
Higher stock prices indicate higher revenues for such companies allowing them to offer their staff some of the most competitive salaries depending on their job description. However, when the company’s stocks crash, companies lose considerable revenue because investors are wary of investing during bearish markets.
As a result, the company loses the foreign investment. What follows would likely be more staff cuts leading to unemployment, delayed expansion projects, smaller pension pots, etc. An economy that experiences any of these could slip into recession.
Benefits of Online Trading
To fully appreciate the effects of online trading on the economy, it is essential to highlight some of the benefits of online trading. The following points will suffice.
1. Cheaper and more Convenient
Unlike traditional trading, online trading is cheaper to run because you don’t have to pay any broker fee payable to brokers resulting in lower trading costs. Online trading is convenient. You can operate from the comfort of your home. All you need is a device with an internet connection.
2. Free and Quick Access to Investments
From your phone, you can monitor your investment anytime from anywhere. You also have access to your investment and know how your money is performing, whether you are losing or gaining. It gives your control over your investment.
3. No Middleman
One significant advantage of online trading is the elimination of middlemen. This helps reduce the investment cost as you don’t have to pay any middleman to do the trading.
4. Transactions are Faster and More Efficient
Transactions are faster and more efficient online. You can quickly transfer money to various accounts with a mouse click.
5. You Can Predict Market Behavior
In traditional trading, the stock broker monitors your investment on your behalf, but you can monitor your investment with online trading. This gives you a better understanding of your money.
Stock trading has gained widespread popularity due to opportunities created by the internet. Online trading has created awareness hitherto not experienced in the stock market.
According to Statista, an estimated five billion people are connected to the internet. A substantial percentage of this number is engaged in various internet businesses. Online trading has expanded the economic space around the world. It has revolutionized the economy through the massive investment it has generated in many countries.