The DOW’s High Record Numbers: What Does It Mean for Business Owners

The Dow Jones Industrial Average hits a record high at 182.24 points. This came after two of the world’s largest economies (U.S. and China) agreed to remove existing trade tariffs.

The Dow Jones Industrial Average, with 123 years of history, is a stock market index that measures the stock prices of the top 30 companies in the U.S. It is used by experts to assess the overall health of the stock market and the investors’ level of confidence in those companies.

The Dow average is calculated by adding all the stock prices of the companies in each index and dividing it by the number of companies.

For 2019, the top five companies that form Dow’s index are Microsoft, Apple, JPMorgan Chase & Co., Johnson & Johnson, and Walmart. Some experts still argue that the Dow is less representative of the broad stock market as it includes only 30 out of the 2,800 companies listed in the New York Stocks Exchange.

Just this year, the Dow Jones Industrial Average broke records three times. The first happened last June 11, when it hit 26,885. On July 3, The Dow hit another record, closing above 27,000. This was the time when President Trump announced that the administration would continue its negotiation with China to avert additional tariffs. And just last week, another record-breaking moment came when Dow’s numbers hit 27,492.63. This led to Dow’s year-to-date gain close to 18%.

But it’s not just the Dow that had their record-setting stock indices. Even the S&P 500 and Nasdaq Composite also finished theirs at the highest level on record.

What does it all mean for business owners?

Stock trading affects companies in a myriad of ways and plays a very important role in the U.S. economy.

Consumer Spending

First of all, trends in stocks influence consumer behavior. When stocks are high, people feel confident over their investment portfolios and feel empowered to spend money on big-ticket items like a home or a brand new car.

On the other hand, falling stock prices make people hold back on spending, especially in non-essential items. They are also more likely to tap on their emergency fund or get a personal loan to cover expenses. Reduced consumer spending has a huge effect on the business sector and obviously slows down economic growth.

Growth and Profitability

Stock trading allows businesses to raise capital for expansion, or to launch new products or pay off debts. For investors, stocks provide an opportunity to profit from gains in stock value.

Moreover, stock prices affect business and consumer behavior, which in turn, impacts the economy overall. This relationship can also be perceived from the other way around – economic conditions influence stock prices.

As a rule, the higher the stock prices, the better for companies. It also suggests a company’s ability to earn and grow its profits in the future.

Business Financing

Another major benefit of high stock prices is in equity financing. During the initial stages of their initial public offering (IPO), most companies receive an infusion of capital which they can use to acquire other companies, fund expansion, or pay off debt. Equity financing is the process of gaining capital by selling new shares. However, for a company to obtain equity financing, it needs to demonstrate a healthy share price that will attract potential investors.

Takeovers

An increase in stock prices also reduces the risk of company takeovers. When a company’s stock price falls, it’s market value goes down as well, which makes it vulnerable to takeovers. Furthermore, companies with high stock prices tend to attract media attention, which positively favors their brand reputation and attracts more potential investors.

While the stock market influences the economy, it’s not the only factor. Things like interest rates, consumer spending, and business spending also influence the economy as a whole. For example, when consumers spend less and invest less in businesses, the economy slows down. Meanwhile, falling interest rates can prompt economic growth. On top of these, fiscal policies, such as rate cuts and large budget deficits, can all impact the health of the business sector.

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