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Go to Business, Finance, Risk, Information Management

The Public’s Influence on Stock Markets: Part 1

6th November 2017 | Michelle Hardy, Ian Pagdin

An introduction to what the stock market is, and how you fit into the definition of 'the public'

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It would be easy to make the throw-away comment that the disparate size and power of the stock markets and most of the companies which trade on them compared to individual members of the public means there is little chance of the latter influencing the former. However, as with life, first impressions are not always completely correct.

To get a fuller picture, we need to look at what a stock market is, who is included in the term 'public' and what constitutes influence between the two. These areas of investigation can also be coupled with technological innovation that suggests not all is as the traditional models would have us believe.

The statement above suggests 'stock markets' are single behemoth, whilst individuals are small islands with no connections or communications between them, neither picture is strictly true. For the stock markets, rather than being a single beast, a better analogy would be that they resemble a coral, with the different global stock markets equating to individual corals anchored to a bedrock of finance. Such corals, when placed in proximity to each other, cooperate to form a reef supporting its own ecosystem just as the stock markets support enterprise and investment.

When we watch David Attenborough’s Blue Planet and he is looking at individual corals, what we the viewers see as one entity is, in fact, colonies of individual entities which make up individual coral. This is also the case with stock markets where separate listed companies work in a framework to form a stock market. Some of the companies in the stock markets will be very large but not all. The individual coral (a stock market) and the reef (the finance industry with all its associated participants) are then open to influence by external factors just as a reef is. Such external factors for a stock market will include the public, with each stock market reacting to external factors according to its own circumstances and characteristics

If we now think about influence, we find the dictionary definition sheds some light on this idea, noting that influence includes having power, including moral power, over another. This power is perceptible only by its effects. What power could the public have which would influence companies on a stock market?

In a stock market, an effect a company is concerned about is the fall of its share price, which can be considered its life blood and is based on the supply and demand for its shares. The idea of a company being concerned about a fall in its share price can be confusing when initially studying the financial markets, as once the company has issued shares via a share issue into the primary market then it will physically receive no further direct cash from share price increases or be expected to give cash to investors where there are share price falls. Rather, those investors who first bought the shares or buy the shares on the secondary market will gain or lose from capital gains or losses as share prices move.

To read part 2 of this blog, click here. To get these updates straight to your inbox, sign up to our newsletters here.

About the authors: Michelle Hardy is a senior lecturer and module leader for several key modules on a variety of finance and international finance courses at Sheffield Hallam University. Her background is corporate banking and international wealth management for 14 years. She is a fellow of the Institute of Chartered Accountants in England and Wales.

Ian Pagdin is Course Leader for Banking & Finance Masters and a variety of finance and international finance courses at Sheffield Hallam University. His background is finance, having worked in the finance industry for 22 years, including 19 years as an independent financial adviser.

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