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STOCK MARKET CREATED WEALTH.   Term Paper ID:28765 Click to get this paper

Essay Subject: Discusses the wealth effect & consumer behavior; stock market gains & effect on companies.... More...

6 Pages / 1350 Words 7 sources, 9 Citations, APA Format $24.00 Return to List of Papers

Paper Abstract: Discusses the wealth effect & consumer behavior; stock market gains & effect on companies. Paper Introduction: Introduction The stock market saw significant increases during the 1990s, and the New Economy and "dot com" companies also changed the way that workers are compensated for their contributions to organizations. Increased numbers of individuals began participating in the stock market either directly or through their retirement and pension funds, and Internet stocks in particular garnered headlines as "Internet millionaires" were created through stock options given to employees who benefited when companies were taken public. However, many of these individuals did not realize their gains in cash, but rather only on paper, although it changed their overall net worth nonetheless. This research examines the wealth created by the stock market and how that wealth has affected consumer behavior, companies in general, and t Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. U.S. How real is the wealth effect? (1998, November-December). Rather than credit thewealth effect with stimulating increases in consumer behavior, thesecritics suggest that other factors might be at work which have not yet beenidentified, or which are being overshadowed by the emphasis on the wealtheffect ("Econ," 2 , p. Among those who have investments in the stockmarket, the figure rises to 9 percent. If only one could buy shares in thewealth effect. Increased numbers ofindividuals began participating in the stock market either directly orthrough their retirement and pension funds, and Internet stocks inparticular garnered headlines as "Internet millionaires" were createdthrough stock options given to employees who benefited when companies weretaken public. Because the net worth ofinvestors increases with "paper" stock gains, the ability to purchasedurable goods also increases. Dolliver, M. This can make it difficult to raise capital in theshort-term, which can affect the organization's ability to conduct itsoperations in the long-term (Hahn, 2 , p. The Wealth Effect and Consumer Behavior The "wealth effect" gained particular attention when Alan Greenspanalluded to it in making comments about stock market performance. 53). 53. Wealth effect piles on the joy forAmerican consumers. The Wealth Effect When the stock market goes up, investors receive an increase in theirnet worth in that their assets held in the stock market also increase.There is no change in the investor's cash position, but (generallyspeaking), liquid asset worth increases as the price of a stock increases.This leads to investors feeling "wealthier" since their net worth hasincreased, at least when calculated on paper. S. The Financial Times, p. ITM 297 D. These analysts maintain thatthe wealth effect leads to increased spending by consumers on both majorpurchases as well as less extensive purchases (such as dining out moreoften) (Hill, 2 , p. Critics of the wealtheffect approach to consumer behavior point out that consumer spendingincreased in 1988 despite a 22 percent decline in stocks in October 1987(Hill, 2 , p. The FederalReserve and other economic decision makers formulate public policy based onthe expectations of how consumers will behave, and the existence (orperceived existence) of a wealth effect can thus have a profound impact onthe economy ("How Real," 2 , p. Controversy Over the Wealth Effect Not all analysts agree that the wealth effect does change consumerbehavior. Business Week, p.52. Already, a number of New Economy companies have seen their stocks riseto high levels, then fall well back. News & World Report, p. The stock market gains also made it possible for companies to offerlower salaries to employees in exchange for stock options which would beexercised in the future. With today's highly volatile stock market, thewealth effect may well be diminished from several years ago as the"Internet millionaire" is replaced by the unemployed "dot com" worker, andemployees may be returning to favoring higher incomes today for promises ofstock options and wealth tomorrow. Stock Market Gains and the Effect on Companies Whether the wealth effect is real or not, there are very realconsequences for companies who participate in the stock market (as well asprivately held companies) and who have seen the stock market surge inrecent years. 3). At the same time, low levels ofinflation and relatively low interest rates mean that consumers perceivelittle benefit from saving money, and thus are more likely to makepurchases today rather than put them off until some future time (Perna,1998, n.p.). If the stock price falls, or if the company never has apublic offering, the stock options are useless and valueless to employees,who would have given up regular salaries and sometimes benefits in exchangefor the options. This critics maintain that, according to the wealth effect, theincrease should have been significantly higher. The upwardpressure on major capital purchases (including houses) would be removed,leaving some homeowners (and companies) owing more on assets than thoseassets are worth ("How Real," 2 , p. ITM 297 D). Journal ofBusiness Strategy, n.p. Investors who reliedon their paper assets to provide a cushion against economic hardship mightfind that they realize less profit (or no profit) when they sell stocks,and may not be able to fund other purchases, such as mortgages. There is another aspect of the wealth effect which is generally notconsidered when addressing the issue directly. Thiscould trigger a sell-off in the market, at prices below what investorspaid, which would result in real, not paper, losses. In general, the results were the same for bothpositive and negative effects: a 33 percent increase in a portfolio beforeconsumers would increase their spending, and a 27 percent decrease in theirportfolios before consumers would reduce spending. (2 , June 12). Recession watch. 52). L. 52). 56). However, the magnitude of the change is in question, asis the very issue of the so-called "wealth effect." While consumers maynot change their behavior for small swings in the stock market, largeswings might well bring about changes, and corporations as well asindividuals do see a change in their net worth regardless of whether theychange their consumption. Greenspan, and those who agree that there is a wealth effect whichaffects the American economy, are concerned that a significant downturn inthe stock market would have a "domino" effect on the economy as a whole.As investors lost their paper profits, some would be forced out of themarket (particularly those with margin calls) while others would simplyfind that their paper profits have been eroded to the point that their networth is the same, or lower, than before the gains were experienced. InvestmentDealers' Digest, p. (2 , October 23). These stock options only become valuable if thecompany is taken public (in the case of privately held companies) or if thestock continues to rise (in the case of companies which are alreadypublicly traded). BondWeek, p. 6). Conclusion Stock market gains are held by some to be responsible for changes inconsumer behavior. Income and ability to pay are certainly theprimary factors taken into account when financing a home, for example, butcreditors also consider the overall net worth of the loan applicant. At the very least,creditors in the commercial and retail sectors should be wary of assetswhich have a large base in the stock market given today's volatility(Charski & Kates, 1998, p. Those who are critical of the wealth effect as a predictor of consumerbehavior also cite more recent economic activity. A similar situation holds for corporate investors whose assetsincrease as a result of their investments (both in their own companies aswell as other companies) and which might therefore be perceived as slightlyoverstating their assets on their financial statements. However, many of these individuals did not realize theirgains in cash, but rather only on paper, although it changed their overallnet worth nonetheless. (2 , May 22). Wealth's effect. In 1999, for example,the average price/earnings ratio in the Standard & Poor's 5 index reachedits highest point in 1 years, but consumer spending only increased 3.5percent. Hahn, A. One report, issued by PaineWebber, indicated that 88 percent ofAmericans maintain that changes in the stock market has had no effect ontheir spending levels. This research examines the wealth created by thestock market and how that wealth has affected consumer behavior, companiesin general, and the economy as a whole. As a result, entire industry segments have beentarnished by the New Economy label with even healthy companies seeing theirstock prices plummet if they are considered to participate in the "hightechnology" segment. (2 , September 9). 3. Workers who are confident that they will have a jobnext week, next month and next year are more likely to make significantpurchases than workers during a recession. If these companies wantto take on new projects, they can issue additional shares of stock in orderto raise capital instead of taking on debt since their stock has performedwell in the past. Accordingto Greenspan and others, consumers who are experiencing gains in theirstock portfolios are likely to make purchases (including houses and cars)based on that perceived wealth, even though a downturn in the market couldsignificantly alter their overall net worth. ADWEEK Eastern Edition, p. Perna, N. In particular, critics of the wealth effect argue that low inflationand high levels of employment are likely to be greater stimulants toconsumer spending. (1998, November 2). Hill, A. The "wealth effect" comesabout when consumers increase their spending based on their newly increasednet worth, and is a point of contention among analysts. Asstock portfolios increase in value, some applicants who might not otherwisequalify for a loan can move into qualifying because of the value of theseassets. However, being able to offer stock options can helpcompanies attract high-caliber workers without having to pay high salariesdue to the publicity surrounding the so-called "Internet millionaires"(Dolliver, 2 , p. Econ: What wealth effect? 3). New economy, bad math. The report, based on a surveyconducted in conjunction with the Gallup polling service, also includedinformation on how much portfolios would have to increase before a wealtheffect was induced. S., & Kates, A. Companies which sell equity and which have seen their stockprices increase are in a strong capital position. Introduction The stock market saw significant increases during the 199 s, and theNew Economy and "dot com" companies also changed the way that workers arecompensated for their contributions to organizations. (2 , July 31). Amazon.com is among the more widelypublicized of these companies, but smaller organizations have gone out ofbusiness after seeing a surge in their stock price that their operationscould not justify. 6. References Charski, M. Rights offerings and similar instruments can be used to"pre-sell" such shares and maintain control over those who actuallypurchase the stock, at least initially (). 56. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.