Have you ever wondered how sharemarkets work?
Since the start of the year, global sharemarkets have been making headlines as financial pressure continues from the Covid-19 pandemic.
But why does that happen?
Suzanne Kinnaird has been an investment adviser with Forsyth Barr in Dunedin for the past 20 years.
She works with clients, who have money to invest, advising them on where she thought they will get the best return on their investment.
When not talking to clients, she is reading the latest business news or reading financial research. She said it was important to to keep up to date.
Sharemarkets are operated by a stock exchange.
There are stock exchanges all over the world, some of the biggest being in the United States.
New Zealand has the NZX based in Wellington.
When a company gets to a certain size, it can list on the sharemarket to generate capital to grow the business.
Once listed, investors can buy shares which give them part ownership in the company and a slice of any profits.
Dunedin has three listed companies: Pacific Edge, Scott Technology and Blis Technologies.
The NZX is the first sharemarket to open each day around the world, with trading starting at 10am Monday to Friday.
For many years, the sharemarket had largely flown under the radar, particularly after the day’s results were no longer broadcast on the 6pm television news, Ms Kinnaird said.
Every "man and their dog" had shares before the 1987 sharemarket crash and because of that "it probably scared people away", Ms Kinnaird said.
Most people with KiwiSaver were invested in the sharemarket, through the different funds they had opted into, and probably did not know it.
The recent rise in online investment platforms had also piqued people’s interest, which was a "really good thing", she said.
Since the start of the year, markets around the world have crashed.
The US’ S&P500 had the worst start on record dating back to 1929, the year of the Wall Street crash.
About 40% of the stocks on the tech-heavy Nasdaq were down by 50% and, in New Zealand, the NZX dropped by about 6%.
But why do they do that?
The thing to remember about the sharemarket was that it represented real companies trying to make money by either selling goods or providing services, Ms Kinnaird said.
So if something was to happen that could prevent that, like a pandemic, then it could cause the share price to go down.
For example, shares in the international social media company Meta, which owns Facebook, fell 26% on Friday morning after it issued a poor financial forecast, blaming Apple’s privacy changes and increased competition from other social media companies.
The drop saw the company lose more than $US200 billion ($NZ300 billion) from its market capitalisation — the total value of all a company’s shares.
On the flip side, if the company announced a profit, its price could go up.
An example was NZX-listed company Skellerup, which announced on Thursday it had upgraded its net profit after tax (NPAT) guidance for first half of the financial year.
It estimated its NPAT would be around $23 million, up 18% on its original forecast.
That caused the company’s share price to rise about 5% during Thursday’s trading.
As the Covid-19 pandemic took hold in 2020, sharemarkets around the world crashed as businesses and investors worried about the potential fall out, Ms Kinnaird said.
As the world recovered, so did the markets as confidence grew back with things like Covid-19 vaccine and as big countries like the US began opening up again.
"That meant there was a very, very strong recovery," Ms Kinnaird said.
The most recent crash in early January was largely due to "very high" inflation numbers in most countries.
Inflation meant companies and people were having to spend more on day-to-day outgoings which would mean they had less money to spend on other things.
Higher inflation usually resulted in higher interest rates, which meant companies had to spend more on their loans and that could mean that a company’s profit estimates could be downgraded, Ms Kinnaird said.
The markets were also cautious about the impact that Omicron could have on a business’ operations.
In the long term, world markets and investors were also trying to look forward to a post-Covid world and how a company might perform over that time.
Companies might put out an announcement with a "strong headline figure", but the market would react to how it thought it will perform in the next year or two.
"It is looking through Covid at the moment and trying to get an idea of what the outcomes will be down the track," she said
Even when the world was not in the grips of a pandemic or an economic crisis, there would usually be something that is affecting the markets.
"That is just the way it is and that is not a bad thing," she said.
