What Is the Stock Market?
Basics for bulls and bears
by Holly Hartman
The word stock simply refers to a supply.
You may have a stock of T-shirts in your closet, or a stock of
pencils in your desk. In the financial market, stock refers
to a supply of money that a company has raised. This supply comes
from people who have given the company money in the hope that the
company will make their money grow.
A market is a public place where things are bought and sold. The
term "stock market" refers to the business of buying and selling
stock. The stock market is not a specific place, though some people
use the term "Wall Street"—the main street in New York City's
financial district—to refer to the U.S. stock market in
general.
Why Companies Issue Stock...
If a company wants to grow—maybe build
more factories, hire more people, or develop new products—it
needs money. It could get a loan from a bank. But then it would owe
money. By issuing stock, a company can raise money without going
into debt. People who buy the stock are giving the company the
money it needs to grow.
Not every company can issue stock. A business owned by one person
(a proprietorship) or a few people (a partnership) cannot issue
stock. Only a business corporation can issue stock. A corporation
has a special legal status. Like a school, its existence does not
depend on the people who run it. Under the law it is separate from
the people associated with it, and has special legal rights and
responsibilities as well as its own unique name.
...And Why People Buy It
Owning stock in a company means owning part of
that company. Each part is known as a share. If a company has
issued 100 shares of stock, and you bought one, you own 1% of that
company. People who own stock are called stockholders, or
shareholders.
Stockholders hope the company will earn money as it grows. If a
company earns money, the stockholders share the profits. Over time,
people usually earn more from owning stock than from leaving money
in the bank, buying bonds, or making other investments.
One Man, 5,000 Votes?
Stockholders in a company usually have voting
rights. They vote on such issues as who will be elected to the
board of directors—the group of people who oversee company
decisions—and whether to buy other companies. Stockholders
typically have one vote for each share they own. Every vote counts,
but a stockholder with 5,000 shares will have more influence on the
company than someone with only one share.
Most companies have annual meetings, where stockholders cast votes
and ask questions of the company's leaders. If they cannot attend,
stockholders may use an absentee ballot to vote. Shareholders also
receive quarterly and annual reports that tell them how the company
is doing.
What Goes Up Earns Bucks
When the price of a particular stock rises, that
stock is said to be "up," meaning up in price. When the price
falls, the stock is said to have gone "down." The terms "up" and
"down" are also used to describe the rise and fall of the market as
a whole.
As a company makes money, the value of its stock goes up. For
instance, pretend you bought some shares of stock for $10 each.
Since you share the company's profits, if it does well the shares
might later be worth $15 each. You could then sell your stock and
make $5 on each share. If the company loses money, however, you
would also share its losses. Those $10 shares might each be worth
$3 if the company fell on hard times.
Those Funny Fractions
In April 2002, all stock exchanges in the U.S.
began trading their stocks in dollars and cents.
For instance, the price of a particular stock might go up $1.10.
This means that the price of a stock increased $1.10 over its
previous price. If a share of stock had been worth $10, it would
now be worth $11.10.
This is different from the earlier system, when stocks were traded
in fractions based on 1/8th. If a stock worth $10 went up 1 and
5/8ths, it meant that the stock had risen $1 plus 5/8ths of a
dollar in price, or a total of $1.62. In other words, if each share
had been worth $10 previously, it would now be worth $11.62.
But why divide each dollar into eighths when it could simply be
divided into hundredths—a hundred pennies, to be exact? It's
because the U.S. dollar is a relatively new kind of currency. When
the stock market opened at the end of the eighteenth century,
prices were based on the Spanish dollar, which is divided into
eighths.
Of Bears and Bulls
Bears are cautious animals who don't like to
move too fast. Bulls are bold animals who might charge right ahead.
An investor is said to be "bearish" if he or she believes the stock
market will go down. A "bearish" investor will buy stock
cautiously. A "bullish" investor believes the market will go up. He
or she will charge ahead and put more money into the market. An
investor can be bearish or bullish about a particular kind of
stock.
Likewise, the term "bear market" describes a time when stock prices
have been falling on the whole. A "bull market" is a period when
stock prices are generally rising.
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