The numbers we see every business day can tell us important information about our economy, but where do they come from and what do they mean?
Let's get started by talking about companies. There are two basic types. The first is called a private company. Ownership in these companies is private, which means it's not available to everyone. They are usually small to medium-sized and there are a lot of them, from the bakery down the street to a local trucking company. Private companies are typically owned by an individual or a small group of people. Because ownership is limited, we won't worry about them.
Our focus is on companies that offer ownership to everyone. These are called "public" companies. Here's how they work.
Let's say Zipper Corp is a successful company that has big plans. It wants to expand and build a button factory, but it doesn't have enough money. Because it's a public company, Zipper Corp can divide up the ownership of part of the company into thousands of pieces and sell them to people like Maya. These are company stock, also called shares. This way, Maya gets to own a small part of the company and Zipper Corp can raise money for their new factory. Being a public company allows Zipper Corp to raise money from lots of new owners like Maya.
Now, Maya's share of the company has a value that typically changes each business day. When Zipper Corp is doing well, the future of the company can look promising. This means the value of the company and the value of her shares may go up. People like Maya buy shares because they can make money by selling them at the right time. The big idea is to buy shares at a low price and sell them at a higher price. Of course, this is risky, because a company's future is hard to predict.
For example, people who believe the button factory is a good move, may want to buy Zipper Corp shares because they think the value will increase. People who believe the button factory is a bad idea, may want to sell Zipper Corp shares because they think the value will decrease. This means the company stock has both buyers and sellers.
Each business day, shares change hands, depending on how people feel about the company's future value. Some days there's more buying which can cause the stock price to rise. Some days there's more selling which can cause the stock price to fall. This is true for each public company in the market. As people buy and sell shares, stock prices can change each day. It's these exchanges, across thousands of companies and millions of people that make up a stock market.
When you see news that a stock market rose, it generally means that across public companies, the value of shares went up more than they went down. This is usually considered good news. People feel good about the future, and they're buying shares.
Now, because there are thousands of companies, there has to be an easy way to see the big picture across the market. We do this with an index, which is an average of a specific group of stock prices. Indices help us understand if markets went up or down on a given day by looking at the performance of a group of companies. For example, the Dow Jones Industrial Average is an average of the stock prices of 30 large US companies. The S&P 500 is an average of 500 companies.
We hear a lot about stock markets in the U.S., but there are stock markets all over the world. In each market, companies share ownership with the public and that ownership is exchanged over and over. And we get to see how it all comes together across public companies thanks to indices we see in the news each business day.
This video is an introduction to the basic ideas behind stock markets, including:
• Why companies offer stock to the public
• Why people buy and sell stock
• Why stock prices change
• How we measure the stock markets using indices
NEVER miss a new video.
Our newsletter is monthly and kind of awesome.