The Stock Market
The Stock Market. It is something that comes up often in conversation but remains a big mystery for many.
For some, the Stock Market is a shiny example of what makes America great. For others, it is a den of the worst kind of thieves. But love it or hate it, it is an important part of American business.
So, what is it anyway, and how does it work?
It can be scary, being all alone
Suppose you are a Dutch merchant in, say, the 1600's and you want to make some serious guilder. What would you do?
One way is to send a ship to China or the East Indies to get spices, silks and so on to be brought back for a lot of $$$.
Good idea. But there are some challenges. First, it takes quite a bit of money to hire a ship, fit it out, and hire the crew. Also, the ship will be away for at least a year, plenty of time for there to be trouble along the way – for example, the ship could sink!
So you can do one of two things. If possible, you could pay for the whole thing yourself; you get all the profits but, if something goes wrong, you take the whole loss.
Otherwise, you could invite friends into the deal. As a group, you split the expenses, share the risk, and split any profits. Such a set up was called a "Joint-Stock company” or, in today's business world, a “Corporation.”
In a Joint-Stock company or Corporation, the ownership is broken into pieces called shares.
Each share gives the owner one vote in how the company is to be run.
Often the number of shares a person has depends on how much money they put into it. There is fairness to this. The more money someone puts into a corporation, the more they stand to lose if something goes wrong.
Periodically, the corporation will divide up the company earnings among the shareholders. An amount is assigned, a certain number of dollars for every share. This is called a “dividend.”
Some shares, such as those for the Federal Reserve Bank, are fixed to the holder and cannot be transferred to anyone else. Most other kinds, however, can be sold or transferred to anyone the holder of the stock wishes.
So if you have stock to sell, or wish to buy some, you need a market; a “Stock Market.” In the United States, the largest is the New York Stock Exchange located on Wall Street in New York City.
The story goes that this market began in 1792. On Wall Street, there was a beautiful buttonwood (American sycamore) tree that those wishing to trade stock would meet at, or in front of, to make trades.
Those who traded stocks decided to organize. Later, they found a building to trade in; a “stock exchange.”
To market, to market
So, how does the stock exchange work? Well, it doesn't work like the corner grocery store.
But more like a Mideast marketplace.
Actually, here is how it works.
Suppose you have some shares of the ACME company you want to sell, or you want to buy shares of Alakazam Salt and Pepper.
First, you contact a broker. A broker or brokerage is someone that has paid for the right to trade in the stock market.
Next, the broker sends “floor traders” to the floor of the Exchange.
If you want to sell your stock, these traders look for other traders wanting to buy. If you want to buy, they find people wanting to sell.
The floor traders agree on a price, and the stock is sold.
But it is the nature of markets that prices do not always stay the same. If more people want to buy a stock than those wanting to sell, the stock increases in value or price. But, if more people want to sell a stock than buy, the value or price goes down.
Stocks are always changing in value. This is why some try to "play the market," or buy stocks they feel will increase in value and make them money.
With so much money involved, there needs to be some way to see how the stock market as a whole is doing. The most famous way is the "Dow Jones Industrial Average." The "Dow" averages certain key companies to get a sense of how the market as a whole is doing.
Bull market – The overall value of stocks is going up for several days.
Bear market – The overall value of stocks is going down.
Crash – A day when the values of stock take a huge dive down. The most famous is the stock market crash of 1929.
Using stocks can be an effective way to raise money for a business as well as share risks. But it also provides a way for individuals across the country and indeed the world to participate in, and received befits from, the business activity of the nation. It can be viewed therefore as an original form of crowdfunding (such as GoFundMe).
The Solid Gold Cadillac
(1956) Laura Partridge, a minor shareholder with just 10 shares attends her first shareholder meeting. Enthusiastic about being there, she asks a lot of inconvenient questions of the board members and ends up embroiled in company politics among the major shareholders.
Don't worry about Laura, in the end, she does just fine.
Around the web
What are stocks?
I found a couple of videos explaining how stocks work, one by Wall Street Survivor and the other by Investopedia. Actually, the material is very similar, but different presentations might work better for people.
This is a series of fun videos explaining what stocks are, valued and traded using pizzas. The first I found answers to the question, what is the stock market? The second, how it works.
How the New York Stock Exchange Works
News segment where a reporter goes onto the floor of the exchange to learn how it all works.
Chicago Merc hand signals: Dying art
For many years floor traders would use a system of hand signals. While not used as much, this video quickly goes over some of the signals used. It is rather interesting to see the side video of actual traders using these signals.
Don't miss out on future posts! Sign up for our email list and like us on Facebook!
Check out more hot topics, go back to Home Page
Comments? You can contact me at email@example.com