Insights Basics: Why Viruses Like COVID-19 Effect Stock Markets

You’ve probably seen a lot in the news lately about Coronavirus and its impact on global stock markets. The word ‘slump’; ‘hysteria’ and ‘correction’ have been all over the news channels for days. This blog will explain what those phrases mean, and why viruses effect stock markets.

Stock markets – the basics

What is a stock? – A stock is a piece of ownership of a company. When a company wants to raise finance, to perhaps pay for some kind of expansion, like a new factory, it might chose to sell it’s stock. Part of the companies ownership is then listed on the stock market. Traders can choose to purchase these stocks from the company, and in exchange, traders will expect to receive part of the companies’ profits in the form of dividend payments.

A dividend is the distribution of a company’s profits to people who own stock.

What makes stock prices go up and down?

Stock prices are determined, quite simply, by supply and demand. Stock prices change depending on whatever someone is willing to pay.

A stock will trade on a stock market for a price – this price goes up and down depending on supply and demand. If everyone is scrambling to buy a certain company’s stock, for example Microsoft (MSFT), it’s stock price will go up, and vice versa.

So, why do people want certain stocks and not others?

There are many answers to this question and each particular investor will have their own reasoning. Let’s look at some of the main reasons.

Earnings

A company’s earnings effect its stock price. Earnings are the profits a company makes. Profit is essential to stay in business, so a company which makes high profits is more likely to have desirable and highly priced stock. When a company announces its earnings each quarter – the stock price will likely change if the earnings are above or below what was expected.

COVID-19 – Earning’s in many companies are likely to drop as a result of COVID-19, for example airlines, as people are less likely to travel. Certain companies will do better in this environment, for example private jet firms or cleaning product providers.

International airlines have chosen to cancel thousands of flights as a result of COVID-19 to to a ‘softening of demand‘ which will inevitably reduce their profits.

Innovation

Many tech companies have miserable earning’s in their early years. Massive companies like Uber, Snapchat, and Spotify are among those that have yet to make a profit. However, their stock is very expensive. This is because, whilst the company has yet to become profitable, it’s likeability and innovation gives investors a desire to purchase their stock.

COVID-19 – Companies who can innovate in this environment may see their stock price rise sharply. If a company produced a vaccine or impenetrable face-mask it is likely their share price would shoot up.

Business environment

Governmental decisions impact business environments. Changes in tax rates on companies (corporation tax) will impact stock prices. If taxes are lowered, business profit margins will likely increase, making their dividends higher. With higher potential dividend payments, stock demand is likely to rise.

Supply chain

A supply chain a network of all the individuals, companies, resources, activities and technology involved in the creation and sale of a product, from sourced raw materials to the final product reaching the end user. When supply chains operate smoothly without disruption, businesses can operate more efficiently.

COVID-19 – Coronavirus has had a significant impact on global supply chains. China, arguably the world’s manufacturing hub was the source of Coronavirus, and has subsequently taken drastic measures to stop it’s spread, like closing factories and restricting travel. This reduces output from companies which means everything in the economy slows down. Meaning companies can create less profit ergo their stock prices fall.

Photo by Austin Distel on Unsplash

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