How does the stock market work? - Oliver Elfenbaum
In the 1600s
the Dutch East India Company
employed hundreds of ships
to trade gold, porcelain, spices,
and silks around the globe.
But running this massive
operation wasn’t cheap.
In order to fund their expensive voyages,
the company turned to private citizens–
individuals who could invest money
to support the trip
in exchange for a share
of the ship’s profits.
This practice allowed the company
to afford even grander voyages,
increasing profits for both
themselves and their savvy investors.
Selling these shares in coffee houses
and shipping ports across the continent,
the Dutch East India Company unknowingly
invented the world’s first stock market.
Since then, companies have been
collecting funds from willing investors
to support all kinds of businesses.
And today,
the stock market has schools, careers,
and even whole television channels
dedicated to understanding it.
But the modern stock market is
significantly more complicated
than its original incarnation.
So how do companies and investors
use the market today?
Let’s imagine a new coffee company
that decides to launch on the market.
First, the company will advertise itself
to big investors.
If they think the company is a good idea,
they get the first crack at investing,
and then sponsor the company’s initial
public offering, or IPO.
This launches the company onto the
official public market,
where any company or individual who
believes the business could be profitable
might buy a stock.
Buying stocks makes those investors
partial owners in the business.
Their investment helps
the company to grow,
and as it becomes more successful,
more buyers may see potential
and start buying stocks.
As demand for those stocks increases,
so does their price, increasing
the cost for prospective buyers,
and raising the value of the company's
stocks people already own.
For the company,
this increased interest helps
fund new initiatives,
and also boosts its overall market value
by showing how many people
are willing to invest in their idea.
However, if for some reason a company
starts to seem less profitable
the reverse can also happen.
If investors think their stock
value is going to decline,
they’ll sell their stocks with the hopes
of making a profit
before the company loses more value.
As stocks are sold and demand
for the stock goes down,
the stock price falls,
and with it, the company’s market value.
This can leave investors with big losses–
unless the company starts to look
profitable again.
This see-saw of supply and demand
is influenced by many factors.
Companies are under the unavoidable
influence of market forces–
such as the fluctuating
price of materials,
changes in production technology,
and the shifting costs of labor.
Investors may be worried about
changes in leadership,
bad publicity, or larger factors like
new laws and trade policies.
And of course,
plenty of investors are simply ready
to sell valuable stocks
and pursue personal interests.
All these variables cause day-to-day noise
in the market,
which can make companies appear more
or less successful.
And in the stock market,
appearing to lose value often leads
to losing investors,
and in turn, losing actual value.
Human confidence in the market has the
power to trigger
everything from economic booms
to financial crises.
And this difficult-to-track
variable
is why most professionals promote
reliable long term investing
over trying to make quick cash.
However, experts are constantly
building tools
in efforts to increase their
chances of success
in this highly unpredictable system.
But the stock market is not just
for the rich and powerful.
With the dawn of the Internet,
everyday investors can buy stocks
in many of the exact same ways
a large investor would.
And as more people educate themselves
about this complex system
they too can trade stocks,
support the businesses they believe in,
and pursue their financial goals.
The first step is getting invested.
