The Stock Market:
The Road to
Prosperity Blog Post
Overview of Stock Market
The stock market in the US is an essential part of the economy. The rising stock market determines the wealth and health of the US economy. So what is the stock market exactly measuring? To explain the stock market, a simple business of lemonade stand can serve as a good example. Jill owns a lemonade stand and she wants to expand her business. She wants to get a loan, but the bank says it is too risky.
As a result, Jill gives everyone a chance to invest in her business by letting her business go public through initial public offering, or IPO. Through IPO, people get shares of the owner’s business, and the owner uses money to expand the business further, thus creating more profit. Then, the profit goes back to the investors as dividends to make them buy more shares. Additionally, the profit can go towards research and development of new products.
Eventually, one of her new investors can buy shares from one of the original investors twice the amount what she paid for them. Essentially, the stock market is a market where people buy and sell tiny pieces of companies, with their prediction of their future prices of the companies.
Major Stock Markets
There are two main stock exchanges in the US, the New York Stock Exchange and the NASDAQ. The New York Stock Exchange is the biggest stock exchange in the world, and it was created in 1792 by 24 stockholders in Wall Street. The New York Stock Exchange is where shares of big companies like IBM or GE are traded.
On the other hand, NASDAQ, created in 1791 is a different type of system as all the trading happens electronically. Therefore, it is where shares of companies like Apple or Facebook are traded. These two stock exchanges are the center of the stock market in the US. That is where indexes come in, as they take share prices and transform them into a clean number, tracking the performance of companies. For instance, the S&P 500 tracks 500 biggest companies in the US and the Dow Jones tracks 30 companies that they think are the most important in the US.
Additionally, countries have their own indexes to track their companies’ performance.
Big Corporations
Nowadays, big corporations are publicly traded. However, in the 1900s, there were only one shareholder in big corporations such as Carnegie, Vanderbilt, Rockefeller, etc. But the concept of one shareholder changed as people discovered that publicly giving shares was better as it gave more incentives for the company to grow. Investing helped the shareholders, bondholders, employees, suppliers and the community.
The big corporations helped the American middle class and allowed them to succeed if they knew the stock market. For instance, Warren Buffett recommends an index fund, which puts little money in all companies in the index to have higher probability of profit. Moreover, you can also give your money to professional investors to beat the stock market.
On the other hand, John Maynard Keynes proved through his experiment that stocks are based on people’s most popular story of the company. His experiment with the beauty contest found that people voted on what other people vote on.
This stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a measure of how much money a business makes before certain costs.