The Wealth Effect

Filed Under »
Dictionary Says

Definition of 'The Wealth Effect'

The premise that when the value of stock portfolios rises due to escalating stock prices, investors feel more comfortable and secure about their wealth, causing them to spend more. For example, economists in 1968 were baffled when a 10% tax hike failed to slow down consumer spending. Later this continued spending was attributed to the wealth effect. While disposable income fell as a result of increased taxes, wealth was rising sharply as the stock market moved up. Undaunted, consumers continued their spending spree.
Investopedia Says

Investopedia explains 'The Wealth Effect'

The wealth effect helps to power economies during bull markets. Big gains in people's portfolios can make them feel more secure about their wealth and their spending. However, the relationship between spending and stock market performance is a double-edged sword as poor stock prices in bear markets hurt economic confidence.

Sign Up For Term of the Day!

Try Our Stock Simulator!

Test your trading skills!

Related Definitions

  1. Consumer Confidence Index - CCI

    A survey by the ...
  2. Discretionary Income

    The amount of an ...
  3. Disposable Income

    The amount of ...
  4. Equity

    1. A stock or ...
  5. Federal Reserve Board - FRB

    The governing ...
  6. Personal Income

    Total ...
  7. Wealth

    A measure of the ...
  8. Upper Class

    A socioeconomic ...
  9. Boom

    A period of time ...
  10. Dow Jones Industrial Average - DJIA

    The Dow Jones ...

Articles Of Interest

  1. Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  2. Understanding The Consumer Confidence Index

    We look at this closely watched economic indicator to see what it means and how it's calculated.
  3. DCF Valuation: The Stock Market Sanity Check

    Calculate whether the market is paying too much for a particular stock.
  4. How Interest Rates Affect The Stock Market

    Whether you're buying lunch, a home or a stock, you're influenced by interest rates.
  5. Stock Market Simulators: Play Your Way To Profits

    Online stock simulators make learning about stocks as fun and easy as playing a game.
  6. Understanding Interest Rates, Inflation And The Bond Market

    Get to know the relationships that determine a bond's price and its payout.
  7. Why There Are Few Sell Ratings On Wall Street

    We outline reasons that may show why enforcing more sell ratings isn't guaranteed to increase Wall Street's objectivity.
  8. The Roles Of Traders And Investors In The Marketplace

    Discover how these two groups work together to keep the market functioning properly.
  9. Advocacy Group Seeks To Change Name Of S&P 500

    "Brokers Against Unpleasant Sociolinguistics" are campaigning to change the name of the S&P 500 Index.
  10. The 5 Biggest Stock Market Myths

    Stocks that go down must come up, right? Wrong. We bust this myth and four other common market misconceptions.

comments powered by Disqus
Recommended
Loading, please wait...
Trading Center