The stock market and businesses are like the two sides of a coin when we look at it from the economic perspective. The performance of both sectors affects each other and there exists a direct relationship between them. The ups and downs in business and stock market help in ascertaining any future business booms or depression in the economy.
Businesses can formulate their strategies based on the stock market fluctuations. For Instance, when there is a bullish trend in the stock market, the businesses that deal in luxury items can price their products competitively to woo the customers. The boom in the stock market is sure to promote the spending spree among the investors and hence they can take advantage of this opportunity. The portfolio managers can also adopt the market strategy approach to maximize their capital gains based on the fluctuations in the stock market. These stocks would be highly risky but they guarantee maximum returns. When the markets are down, the business needs to move to a more conservative and less risky strategy.
Positive and Negative Impacts
The Businesses need to keep a close watch on the stock market trends and formulate their strategy in line with it to reap the benefits of the positive fluctuations. Whilst doing that, they also need to devise a plan for the negative impacts. There should be a strong business plan in place to deal with the gloomy situations. The negative fluctuations are sure to impact but if the business plans effectively it can reduce the extent of the damage.
The investment companies usually resort to diversifying their portfolio so that they are not affected by the drop in one sector. Likewise business needs to adopt these models and diversify their products/services. There are certain businesses that are not affected by the stock market trends and some that are heavily dependent. The FMCG sectors are generally less affected by the stock market trends but the conspicuous goods/services are affected by the fluctuations. The firms can have a right mix of both these lines to ensure sustained and profitable growth.
There is no one quick solution or remedy to the adverse effects of market volatility but we can adjust our strategies to ensure sustained development. This will increase the investor confidence in the business and promote more participation by the way of re-investment.