When a company is going to public, it will issue shares in order to collect money from the public. The company will pay dividend in exchange for the shareholders. In other words, i buy the shares = i invest money on the company; shares = money.
Just now i was reading a book which about why the stock market will affect the economic condition? According to this book, it said that when a company performs badly, the shareholders will not buy the share of this company and therefore the share price drops. because of the investors did not get profit, so it will depress the purchasing activities and eventually cause the economic condition get worst.
The process is as below:
company's performance drops --> share price drops --> purchasing activities drops --> economic condition get worst
So, we can see that the share price reflect the company's performance. But, the share price does not affect the company's performance.
However, the above process is not complete.
i summarized my views as a process shown as below:
any element in [G+C+I+(X-I)] drops --> market condition get worst --> many companies performance drop --> investment activities drop --> share prices drop
Actually the stock market can't affect the economic condition. Instead, the economic condition affects the stock market.
Another thing i want to talk about is what actually affects the economic condition?
i think that the main reason that affects the market condition is the elements in GDP which are Consumer, Government, Investment and (Export - Import). This is because when the stock market is facing a disaster, it means that the companies are facing difficulties, mostly they are facing loss. what makes the companies in trouble? it could be many factors including minor and major factors. The minor factors (e.g. new competitors entered into the market, new product's sales drop, etc.) that affecting few companies will not affect the economic conditions. But, the major and critical factor will affect the economic conditions such as inflation, government policy, unemployment rate increases, consumer purchasing power decreases, etc. Thus, i conclude that these are the main factor that affect the economic condition of a country.
Therefore, stock market is just a signal or indicator of the condition or performance of the economic wherein it reflects the economic condition; it is not the main factor that affects the economic condition.
So, if next time you see that the stock marketing is in disaster, you will know that the economic condition is getting worst. But, remember that, the economic condition affects the stock market instead of stock market affects the economic condition.
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