The Stock Market, A Global Ecosystem

The words Stock Market can be off-putting and seem like feather waving gambling to some. However, there’s a really good chance you’re invested in the stock market and don’t even know or at the very minimum a stakeholder in the market! The stock markets tentacles of reach are a lot farther than you may presume. You may never own a stock in your life but we are affected more than we know by the invisible hand of the stock market.

Corporate employees vested in the stock market

If you’re a corporate employee or government employee and you contribute to a 401(k), 403(b), 457 that’s money going into the stock market. Largely that money is invested into mutual funds which is usually comprised of baskets of publicly traded companies on the stock market. Now let’s say we are agnostic to what country we invest in and don’t have home country bias in this discussion not limiting ourselves only to the U.S. Stock market. Just like we have an American market there are 60 other major stock exchanges across the globe scattered in various countries. Companies in those funds could be foreign companies trading on foreign stock markets.

If you get a pension, you’re still vested in the stock market

You wipe the sweat of your brow and say thank god I’m one of the lucky ones that gets a pension in an era of dwindling pensions. What’s interesting about pensions is while you may not be investing directly in the stock market you are a large stakeholder in it. Typically, when you have a pension there is a fixed percentage, they take from someone’s salary or the employee gets a reduced salary but the employer pays the contribution on the employees’ behalf. The employer takes that money and puts it in the pension fund which then they invest in the stock market! The pension fund has to grow so the employer can pay you the guaranteed amount you have been promised. You say, “well doesn’t that have risk?” Yes, there is a lot of risk the money if the pension doesn’t perform as well as forecasted. Pension funds have return forecasts, invest accordingly to what risk they can bear, and always can come out of pocket to contribute more to the fund to meet these targets. Just like an unpredictable blackswan event can be disastrous to someone investing their 401(k) in the stock market so can it be for your pension. Pensions vary greatly but sometimes the pension funds invested don’t perform as well as the employer expected or they don’t have the cash flow to make additional contributions. This is where you hear of pension funds cutting their benefits suddenly or grandfathering in people up to a certain year and for anyone hired after a certain date a different pension benefit if at all.

Sovereign Wealth Funds

Governments can take in a surplus of cash due to natural resources, trade surpluses, excess bank reserves, or foreign currency operations. All of this surplus cash can be used to construct a Sovereign Wealth Fund. Sovereign Wealth Funds range in the rules each of them can invest in but often they are invested in the stock market. Norway has 71% of their Sovereign Wealth Fund invested in stocks. This wealth fund is a pension fund to benefit the Norwegian people and it’s subsequent generations. The fund can be used in various ways one of which includes stabilizing the Norway economy as needed which implies very broad and important implications to all Norwegian people, as 20% of the government budget is paid by the fund.

Insurance Companies

Insurance companies take your money in the form of a premium and in return protect you from some sort of risk. How do you know the insurance company will be able to pay you though once a claim comes due? This has to do with the financial strength of the insurance company. When you make a premium payment to an insurance company, they won’t need to pay that dollar back out to you until a claim comes due, if ever. In the meantime, while the insurance company holds that dollar they invest it in the stock market. If their investing performs very badly this can be problematic if your house gets blown down by a tornado and they have to come up with a lot of money for a lot of people unexpectedly. There are rules and regulations for insurance companies but how well each insurance company is able to invest that money will vary. On the other hand, if a insurance company is able to invest the money and earn very high rates of return not only will the company be more profitable, they will be able to offer more competitive insurance policies.

sources:

https://www.nbim.no/en/the-fund/about-the-fund/

http://money.visualcapitalist.com/all-of-the-worlds-stock-exchanges-by-size/

https://www.investopedia.com/terms/s/sovereign_wealth_fund.asp

Thank you for your continued readership

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