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Stock Market Volatility Is Caused By Businesses Yet Detrimental To Business Activity And Profitability. Discuss.

Free essay example:

Title: “Stock Market Volatility Is Caused By Businesses Yet Detrimental To Business Activity And Profitability”

Module Name:

Business Environment

Module Number:

CORP1111

Tutor Name:

Peter Lee

Tutorial Day:

  Wednesday

    4pm-5pm

Student Name:

Qasim Sheikh

Student ID Number:

P09291475

In this essay I will be discussing how the stock markets volatility is caused by business activity as well as damaging the activity and the profitability of a business overall. I will firstly start by explaining what the stock market is and what the capital market consists of and then go on to discuss the different types of stock market and shares. I will then move onto saying what different types of markets and investors there are and also touch upon the aspect of window dressing; from here I will then cover how the stock market affects business activity and profitability.

The stock market can also be identified as the “stock exchange or Wall Street”. This is where you can purchase and put up for sale daily your stocks, mutual funds, bonds and commodities” (A1). The capital market is where stocks and shares are traded nationally and is a key provider for long term finance for companies. The capital market is formed by two parts, the primary and secondary part. The primary involves in buying and selling new stocks and shares, and secondary involves in buying and selling existing stocks and shares. The main firms which buy stocks and shares are “the insurance companies, pension funds, investment trust, unit trust and other large financial institutions such as building societies” (A2).

The stock market is a place of trading shares and allows people to put money into a business allowing it to gain a source of finance and shape the business further. The more shares that are put into a business by shareholders it will allow them to have a greater say in how the business is run overall. If a business performs well then the value of there shares will rise and essentially be worth more.  

There are three different types of stocks and shares, the first one is known as Preference Shares “these are shares in the company which carry a fixed dividend”. These shares usually carry no voting rights therefore shareholders have very little say in how the company is ran. The second is known as Ordinary Shares which is also called “the equity” of a business; this type of share allows shareholders to receive high dividends in good years and maybe none in bad years. It allows holders to vote and have a say in how the company is run overall. The last type is known as Debentures, “debentures or loan stocks are bonds which are given in exchange for a loan to the company”. A debenture holder is therefore a creditor of a company whereas a shareholder is an owner. (A3)

There are different types of markets such as The Bull Market and The Bear Market. The bull market is where the market grows rapidly and in which prices are rising or are expected to rise” (A4). Whereas the bear market is where the market slows down and the “market condition in which the prices of securities are falling” (A5).

As there is a Bull Market and a Bear Market there is also a Bull Investor and A Bear Investor. A Bull Investor is an investor who buys low and sells high prices of a certain group of securities are rising or are expected to rise”. Therefore Bull Markets can occur in an economic recovery or an economic boom. Whereas the Bear Investor is an investor who sells at the highest price before the market goes down, however this can be risky although there is a chance it may bring a good return “falling prices and an expectation that they will continue falling” (A6). A Stag Investor is an investor who has the intention of buying and selling shares rapidly. As a Stag Investor “hopes that the price will rise high enough in early trading to allow a quick profit to be made”. (A7)

A well known stock investor known across the globe, Warren Buffet, made his wealth only through investing in stocks; he believes in “buying stocks trading near their tangible asset value”. From investing in the stock market Buffets main key was “Never lose any money”, from this it has made Warren Buffet the second richest in the world at a net worth of over $36 billion dollars. (A8)

Window dressing is a form of creating businesses accounts at high figures to make the business seem as though it is performing well. As window dressing is “presenting company accounts in a manner which enhances the financial position of the company” (A9).

The stock market affects business activity and profitability as when businesses sell some shares in a firm this means people from outside the company own a certain amount of the business and have a say in how the business is run. Therefore when people buy shares in a business they desire to make back profit on what they initially pay for the share, this is known as a dividend. This is where the owner of the share is entitled to a share of the profit. If a business pays out more profit for a share then initially more shares would be wanted so the share price can increase so when selling the share it is overall worth more. Rather than a company paying out higher profits to there share holders, If a company re-invests in there business from the profit made, it will allow there business to expand further in the future and advance in technology etc. but this may affect the stock market as it may devalue the business as they will not be paying out higher profits for the shareholders which will cause the share prices to drop and devalue. The stock market can crash when a large amount of cash of shares is swiped away causing interference in the market.

In conclusion the stock market volatility is caused by businesses as a business is what forms the stock market and allows it to trade in the market by selling and buying shares of businesses. Therefore the stock market is overall controlled on how effective the business is performing, as if a business is performing well then the stock market is more likely to improve rather than when a business is not performing. The stock market is detrimental to business activity and profitability as when a business is performing well and decides to use profits for the business rather than giving it to share holders, it would affect the activity and profitability of a business as it would hit them and they would come across there company having less source of finance as shareholders would sell up and invest in another business where they are more likely to make money and watch the business share price increase.

Word Count: 1,116

References:

(A1)

Kimberly Amadeo. (2006). Stock Market. Available: http://useconomy.about.com/od/glossary/g/Stock_Market.htm. Last accessed 5th December 2009.

(A2)

Ian Worthington And Chris Britton (2003). The Business Environment. 4th ed. Leicester: Financial Times Press. P.266.

(A3)

Ian Worthington And Chris Britton (2003). The Business Environment. 4th ed. Leicester: Financial Times Press. P.266.

(A4)

Investopedia. (2009). Bull Markets. Available: http://www.investopedia.com/terms/b/bullmarket.asp. Last accessed 5th December 2009.

(A5)

Investopedia. (2009). Bear Markets. Available: http://www.investopedia.com/terms/b/bearmarket.asp. Last accessed 5th December 2009.

(A6)

Rajnish Jain. (2002). Investment Tips: Bull Market vs. Bear Market. Available: http://www.essortment.com/home/investmenttips_sjql.htm. Last accessed 5th December 2009.

(A7)

Finance Glossary. (2009). Stag. Available: http://www.finance-glossary.com/define/stag/1354/0/S. Last accessed 5th December 2009.

(A8)

Bull Investor. (2009). World's Greatest Investors. Available: http://www.bullinvestors.com/Worlds_Greatest_Investors.htm. Last accessed 5th December 2009.

(A9)

Tutor2u. (2008). Window Dressing. Available: http://tutor2u.net/business/presentations/accounts/windowdressing/default.html. Last accessed 6th December 2009.

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