This past Thursday, the stock market officially dropped 900 points which makes the month of October the markets biggest loss since February. The numbers reported are enough to make any investor pull out. While the stocks took a sudden plunge, panic also set in for not only the investors watching but for the business. This comes unexpectedly as the blue-chip stock hit an all-time high. Technology stocks took the majority of the damage in this decline. Here are the ways that this 900-point drop will affect businesses.
Financial health is affected
When investors are looking at a business, many observe the price. When a stock price is firm, this is an indicator of the business’s financial health. A business is determined to be financially feasible by analysts to inform investors by evaluating the financial data and stock price of the business. The stock price is an indicator for determining if the business’s potentials are content or concerned. With the plunge, several businesses are at risk of not being able to raise capital because potential investors are being told by analysts or brokers that this business may not be in their best financial interest. If the stock for the business continues to fall, they could lose their current investors to, which in turn is critical to their financial health and data reports.
The looming risk of a takeover
A takeover of a business is high when the stock price falls. This is a risk because now the business’s stock price is cheaper. This negatively affects businesses because they are not making capital once the takeover is complete. To understand, the public companies can distribute their shares among thousands of shareholders who have the ability to sell whenever they choose. When organizing a takeover, the bidders have a higher percentage of being able to offer a better price to shareholders solely because the trading price is lower.
This is another reason how this 900-point drop will affect businesses. If their prices are on the cheap side and bidders can and will perform a takeover. The problem with this is that the interests that are being protected by management no longer will be because management for the company will be released. This does not apply to just bidders; another business can be keeping an eye on a declining stock price of another business to perform a takeover. The business acquiring the other is able to avoid taking a debt because they have the finances to back the acquisition.
As an investor, people tend to continuously spend more when their stock of the business they are investing in is on the rise. This indicates that the business is in good financial standing and so is their money. The equity markets improves in wealth when people invest in them for the business as the stocks are increasing. The formula is usually increased wealth = increased spending because outside of the stock market, investors, who are most likely consumers of the business, are actively buying the goods or services. The spending increases revenue for the businesses.
The opposite occurs when numbers drop. So, this 900-point drop has affected the equity market, the revenue, the stock price, and the spending habits of the consumers. When a consumer reviews their portfolio and sees a rapid drop in value they are not going to continue their spending habit. As stated above, an increase in spending means an increase in business revenue, but a decrease in spending means the same for the revenue. This is especially true for businesses who sell non-necessity goods and services, such as high-end vehicles or entertainment, which will cause the consumers the willingly relinquish the items if they are suddenly confined to a smaller budget.
Tech companies will be affected by the drop
Tech companies such as Caterpillar, who took the lead in the recent stock market point decline according to the Dow Jones Industrial Average. The shares of such companies as Facebook, Apple, Amazon, and Netflix have been affected also. Unfortunately, Facebook, Twitter, and Alphabet, a Google-parent company, are receiving extreme governing scrutiny from the U.S. government because of the trade fight that is affecting the supply chain from China. This is due to Trump’s stern stance on Beijing. Chris Zaccarelli, who is Independent Advisor Alliance’s CIO (chief investment officer) mentioned that because of the trade war with China, tech businesses will be affected the most and need to be concerned about the rising interest rates.
Experts are chiming in and saying that this point down is a correction and not the beginning of a crash. Businesses are being informed to not panic, and do not time the market.