In the current market economy all companies that issue shares on the stock-market are linked. Investors make decisions to buy shares, which are a capital contribution to companies. This is the major reason why companies go to the stock-market: to raise capital.
Investors expect to make money in two ways, firstly from dividends which companies distribute to shareholders from their profits and secondly from an increase in the value of their shares. Thus the shares’ value is determined by investors according to the confidence they have in the company. However they are also influenced by other investors’ behaviour. If shares are in high demand, their price will rise and vice versa.
The shareholders’ main objective is to maximise their profit, and this leads to short-term strategies. If a crisis appears on the stock- market, shareholders will stop buying and try to sell shares causing their value drop. That is why shareholders often sell their shares before they decrease in value. So if investors bought shares when prices are low they would make a profit if the demand grows and the more risky the investment, the higher the profit will be. In a credit crisis, investors lose confidence, because they fear a recession, and they are unwilling to invest.
This shows that companies are dependent on the stock-market’s trends even if share values do not correspond to the companies’ well being.
The current financial crisis began with the sub-prime crisis, which took place in the United-States(US). Banks and mortgage companies granted loans to risky borrowers, who might not be able to pay back their debt, and put the debts into financial packages on the stock-market to sell them. These risky packages were considered as assets as the interest rates were variable and often quite high. That is why investors took the risk to buy them and that is how the crisis was spread among the global economy when people realised that these financial packages could not be valued, because no-one