You can't go far in today's world without hearing something about the stock market. Unfortunately, the media take for granted that all of us in the audience understand the stock market. The good news if you don't have a clue how to interpret all of those stock symbols running in the ticker at the bottom of your screen you're not alone.
But that's about to change. Below is an overview of some of things you need to know about the stock market.
Stock Market Background
The purpose of the stock market is to allow businesses to grow and to let investors have a way of earning money. Let me give you an example on a very small scale. Your child opens up a lemonade stand in your neighborhood for a week. She earns a decent profit and decides to open up a second stand at her grandparent's house. Unfortunately, she doesn't have enough money for the expansion. Other kids could pitch to cover the costs and receive a portion of the profits she makes.
That's exactly what happens every day in the stock markets all over the world with thousands of different companies and millions of stockholders.
How to Invest in the Market, Stock Purchasing Guidelines
If you want to purchase stocks, you'll want to form a relationship with a stock trader. These are individuals who work in the stock exchange, through virtual stock exchanges, or with trading software. You'll give them your money, tell them what you want to buy, and they'll complete the transaction on your behalf. For this service, they do receive a commission on the transactions.
Some people also use their traders for stock advice. However, you can make your own choices about which stock to buy. Obviously, the secret to making money is to purchase stock at a lower price and sell it at a higher price. That may sound overly simplistic but it's this thinking that drives all investors.
Another idea to understand is supply and demand because this affects the prices in the market; stock prices go up and down based on this basic principles. For example, if lots of investors realize that big is happening for a company they may all decide to purchase stock in that company. That decision increases demand for that stock thus raising the price. On the other hand, if the same company has a poor financial quarter many investors may start selling off stock which means the supply is increasing and the price drops.
Earning Money from Stocks
Another question you might have is how you earn money from the stocks. As a stockholder, you receive a portion of the company's profits. When the company determines their earnings and deduct all of their expenses, they are left with their profit. That profit is divided by the number of stockholders and each receives a portion. For example, if you own 1% of a company which generated $2 million in profit then you would earn $20,000 for your stock. If the company doesn't make any profits, however, you don't receive anything.
Wall Street, also known as the Dow, or the NYSE, is located in New York
Wall Street is the Address(or is it?)
Many people think of Wall Street and the Stock Market as one in the same, and indeed, it used to be that way.
Dutch settlers initially built a stockade here in 1653 for defense purposes. In 1685 the stockade was torn down and a street was built called Wall Street. In 1790 the first Stock Exchange was founded in Philadelphia which became the model for the New York Stock Exchange.
In 1817 the NYSE was officially opened. The NYSE was moderately successful till the early 1900's when the market entered a boom period which lasted more or less until 1929.
This boom period of course could not last forever, things were so out of kilter that people were mortgaging their homes and leveraging themselves to the limit to buy shares. The boom period crashed in 1929 and caused the Great Depression.
The 1929 Crash was caused in part by the fact that the Stock Market was virtually unregulated, which it remained even until after the market crash of 1987 which saw the Dow suffer what was the largest losing day in the Market's history.
Black Tuesday - October 29th, 1929
On Black Tuesday, a record of 16.4 million shares were traded and the ticker tape fell behind two and a half hours. On Monday, the stock market suffered a record one-day loss of around 13 percent. On Black Tuesday, the market suffered a loss of about 12 percent and did not recover for 22 years.
The economy eventually recovered from its catastrophic losses but the unregulated Stock Market practices that had partially caused the crash in the 1929 still existed and caused the stock market crash of 1987, which saw the Dow Jones suffer what was the largest single-day loss in the stock market's history.
Today's Stock Market
Today's stock market consists of about 500,000 computers all networked with dealers for the NYSE or market makers for the NASDAQ. Up until recently the Dow still used human intervention but at present all trades are computerized.
The 2 most important stock market networks are the NYSE and NASDAQ. NASDAQ is a relatively new Stock Trading System that has been computerized since its inception, where market makers normally lead trades.
It used to be that more risky stocks were traded on the NASDAQ than on the NYSE, but that distinction is fading.
The difference between the NYSE and Nasdaq is in the way securities on the exchanges are transacted between buyers and sellers.
The Nasdaq is a dealer's market, wherein market participants are not buying from and selling to one another but to and from a dealer, which, in the case of the Nasdaq, is a market maker.
The NYSE is an auction market, wherein individuals are typically buying and selling to each other and there is an auction happening; the highest bidding price will be matched with the lowest asking price.
All these computers are linked to computers worldwide. These computers can be found in banks, small businesses, and large corporations.
These computers comprise the banking networks which make computerized transactions possible. To give you an idea as to how much gets traded: in New York City Stock Market Trades amount to over $2.2 trillion dollars daily
How has the U.S. Stock Market done in Times of War?
The worst Stock Market returns were achieved during the Vietnam War.If this happened because of the uncertainty of the times is a good question. Stock Markets do not like uncertainty and will act negatively.
Returns during the Korean War however were excellent and averaged about 18% per year while 2nd world war returns averaged about 13% per year.
The 1987 Stock Market Crash
The crash of 1987 was one of the most remarkable financial catastrophies of the 20th century, perhaps since the start of the financial system several centuries ago. Why it was so strange because it should not have happened and even today we cannot fully comprehend that it did happen.
Markets fell, an unbelievable 23%, and that they did so all over the world at the same time. It only lasted one day.
There is no explanation. No definite reason for the crash has been isolated. The best that one can say is that there were too many similarities to the 1929 crash and that this became a self-fulfilling prophecy.
Both Arkaitz Arteaga & Frank Vanderlugt are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.