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Wednesday, 14 March, 2001, 15:11 GMT
Why stock markets matter for you
Trader looking at stock prices
Will it go up or will it go down?
By BBC News Online's Stefan Armbruster

The saying goes: "Don't invest what you can't afford to lose".

But as stock markets fall, it is not just people who own shares who lose out.

When the bears replace the bulls, in other words, when the market falls, it affects almost everyone because stocks and shares have become an integral part of almost all our financial lives.

Your pension, Individual Savings Account, personal shareholdings, your job, right through to the UK government's policy of selling off gold to buy foreign currency are affected.

There are a variety of ways in which stock market movements impact on our lives.

The upbeat side of the growth in share ownership is that when the stock market goes up, consumers with shares feel richer, they borrow more and they spend more.

It can become a virtuous circle: As consumer spending increases company profits rise, pushing share values higher, making consumers feel better off, so spending increases... and so on..

The ups and downs

But just as the stock market can go up, it can also go down. Usually the first to react to this are the institutional investors who are involved in the financial markets on a daily basis.

The internet boom is an example. Many personal investors felt they were burnt by the popping of the bubble.

By the time they got around to selling shares in any number of failing internet based companies, the big City investors had already pulled out of the market.

Screen based trader
Institutional investors anticipate market movements
The institutional investors did not escape unharmed either.

And the hits that they took also have an indirect, but potentially serious effect, on many people's financial health.

Any pain suffered by these institutional investors impact on the returns paid on pensions, savings accounts or the interest charged on mortgages.

For individuals with a more direct interest - say day traders attracted by the tech boom - share holdings can be used as collateral to borrow money.

But if the value and income from shares evaporate and the bank calls in the loan, the result can be big losses or personal bankruptcy.

Pensions and jobs

Meanwhile pensions linked to the stock market, like the ones being promoted by the UK government, are not immune.

Unlike the state pension which is paid out at a rates set by the government, investing in a private pension indexed to the stock market can increase the value of the contributions dramatically, but they can also be erased.

Your job can also depend on the markets as companies use their valuation and the issue of new shares to borrow capital to expand.

If they are unable to do this then they have to find ways of increasing the company's value to attract investors. The key tool they use is to cut jobs.

None of the above

Even if you do not have a pension, do not have any savings and do not have a job, you will be affected.

When overseas stockmarkets fall, foreign investors often remove money from that country altogether, reducing the value of the currency.

UK company profits - especially in the United States - will be doubly affected by the fall in its currency and the weakness in its economy.

And that could create problems for the UK economy, which might not grow as fast as was originally expected.

And the collapse in confidence - by both companies and individuals - could make any economic slowdown worse.

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See also:

03 Jan 01 | Business
Stock prospects for 2001
22 Dec 00 | Business
The $3,000bn question
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