Stock market crash causes economic decline.

The stock market is an excellent economic indicator for the U.S. economy. It reflects how well all listed companies are doing. If investors are confident, they will buy stocks, stock mutual funds, or stock options. Some experts believe markets predict what the savviest investors think the economy will be doing in about six months. What Makes the U.S. Stock Market Attractive U.S. financial markets are very sophisticated and make it easier to take a company public than in other countries. Information on companies is also easy to obtain. That raises the trust of investors from around the world. As a result, the U.S. stock market attracts the most investors. It’s an attractive place for U.S. companies to go when they are ready to grow. 3 Ways That Stock Markets Affect the Economy Stock markets affect the economy in three critical ways: They allow small investors to invest in the economy. They help savers beat inflation. They help businesses fund growth. Allowing Small Investors to Invest in the Economy Stocks allow the individual investor to own part of a successful company. Without stock markets, only large private equity investors and financial institutions could profit from America's free market economy. Helping Savers Beat Inflation Investing in the stock market helps savers beat inflation over time. The rule of thumb is that stock prices increase 7% a year on average after taking inflation into account.1 That's enough to compensate most investors for the additional risk of owning stocks rather than bonds (or keeping the money in a savings account). Note Stocks provide the capital for companies to grow large enough to gain a competitive advantage through economies of scale. Helping Businesses Fund Growth. Growing, successful businesses need capital to fund growth and the stock market is a key source. In order to raise money this way, owners must sell part of the company, and to do so they "take the company public" through an initial public offering (IPO) of the company's shares. An IPO raises a lot of cash. It also signals that the firm is successful enough to afford the IPO process. The drawback is that the founders no longer own the company; the stockholders do. However, founders can retain a controlling interest in the company if they own 51% of the shares. Note Stocks indicate how valuable investors think a company is. When stock prices rise, it means investors believe earnings will improve. Falling stock prices mean investors have lost confidence in the company's ability to profit. How a Stock Market Crash Affects the Economy Stock prices rise in the expansion phase of the business cycle.2 Since the stock market is a vote of confidence, a crash can devastate economic growth. Lower stock prices mean less wealth for businesses, pension funds, and individual investors. Companies can't get as much funding for operations and expansion. Note When retirement fund values fall, it reduces consumer spending. A stock market crash will adversely affect the nation’s gross domestic product as personal consumption and business investment are some of the major components of GDP. If stock prices stay depressed long enough, new businesses can't get funds to grow. Companies that had invested their cash in stocks won't have enough to pay employees, or fund pension plans. Older workers may find that they don't have enough money to retire.