Stocks and the Stock Market
The stock exchange is a marketplace where brokers buy and sell stocks and bonds for other people. Many countries have one or more stock exchanges. Smaller stock exchanges often handle only national stock, whereas the big stock exchanges handle the stock of big international corporations.
Corporation
A corporation is a company that has the right to issue stocks. They are registered with the government and have laws that protect them and their shareholders . Every corporation has a board of directors who make decisions for the company.
People who invest in a corporation usually have limited liability. If a corporation goes bankrupt investors only lose the money that they have invested.
Stocks and Bonds
A person who buys stock becomes one of the company’s owners. They buy a share of a company. A bond is an agreement to lend money to a company for a certain period of time. Companies sell stocks and bonds to people because they need money and want to expand. Sometimes they want to build more factories or develop more products.
If a company makes profits it can use the earned money in a few ways. It may decide to invest more into the company and expand. Most of the time the shareholders of the company get a dividend, which is a part of the yearly profit. This dividend is not always the same and can change from year to year.
Most corporations offer two kinds of stock. Owners of common stock can go to the annual meetings of stockholders, present their own ideas there, ask questions about the company and have a right to vote for the board of directors.
Owners of preferred stock usually do not have voting rights or the right to attend stockholders’ meetings. However, they get dividends.
A person who buys a bond is not buying ownership in a company but lending the company money. It promises to give back the money to the bondholder after a certain time, such as ten or twenty years. In return for the money, the companies pay interest. Not only companies but also governments can issue bonds if they need money.
People buy stocks and bonds because they hope that a corporation will earn money as it grows. As time goes on shareholders usually earn more money by owning stock than by saving their money in a bank or investing in other things.
Buying stock is also a risky business. If you buy a share of a certain company and it does well over the years the value of your shares will go up. You could sell them at a much higher price than when you bought them. Sometimes, however, things happen that make the value of certain stocks go down. If a company does badly or goes bankrupt the value of your shares goes down too and you actually lose money.
There are many reasons why the price of a company’s stock rise or fall. For example if people are afraid that prices will go down, they may start selling their shares. If many people sell a large number of stocks, they can actually make prices go down. If this continues for a longer time it may lead to a crash. Prices of stocks fall so low that people don’t want to buy them any more because they are afraid they won’t get their money back.
Stock exchange
To buy stock most people go to a broker, a person who is member of a company that is allowed to buy and trade bonds and stock.
Let’s say someone in California wants to buy 2000 shares of a company. He doesn’t have to travel to the New York Stock Exchange. He calls a stockbroker, usually a member of a brokerage house, who gives him information on the company and tells him the price of the stock. When the investor tells him to buy, the broker sends the order to his firm’s trading desk at the stock exchange which then places the order. The order is sent to stock tickers throughout the country that constantly display the value of stocks. Because buying and selling stocks is concentrated in one place you know the price of each stock at once.
Stocks are often traded under a contract called an option. It allows a person to buy or sell stock at a certain price within a certain time. If the value rises within that time and within the price set the stock is quickly sold again. The prices change throughout the day depending on how good or bad trading is. Small orders are usually executed automatically by computers. Large orders however are traded directly at the stock exchange.
Each year investors trade billions of shares worth hundreds of billions of dollars. But not all companies are listed on the stock market. You must be pretty big and have a lot of power. You must also show the stock exchange that you are in a good financial position and that you company is doing well. The world’s biggest stock exchange in New York has about 3oooo companies listed.
To see how well or badly stocks are doing most stock exchanges have an index. This is a number that shows the average share prices of the major companies. The most important indices are the Dow Jones (New York), FTSE (London), DAX (Frankfurt), Nikkei (Tokyo), Hang Seng (Hongkong)
Bulls and Bears
Bears are cautious animals that don’t like to move fast. Bulls are animals that like to charge ahead. At the stock exchange bears are investors who believe that the price of stock will go down. A bull believes that the prices will go up. Likewise, a bear market is a period in which stocks usually fall in value, a bull market a time when they rise.
History of the stock exchange
The first European stock exchange was founded in Antwerp, Belgium in 1531. The first stock exchange in England was formed by a group of brokers in London in 1773. Until that time people usually went to coffee houses to buy and sell stocks because they found the brokers there.
In New York City brokers met under an old tree on Wall Street. They organized the New York stock exchange in 1792.
For many years only rich people bought and sold stock. It was not until World War I that more and more private investors started investing their money in stocks. There was a huge rise in value and investors made a lot of money
Stock market crash of 1929
The worst crash happened in the United States in October 1929. Over many days investors sold so many stocks that the whole market collapsed. This affected the economy not only in America but in Europe as well. Farmers could not sell their crops, factories couldn’t sell their products, banks had to close and workers earned very little money. This lasted for almost ten years and became later known as the Great Depression.
World’s biggest stock markets
Place |
Market value in |
New York Stock |
21 |
NASDAQ (New York) |
4.5 |
Tokyo |
4.5 |
London |
4 |
Shanghai |
3 |
Hongkong |
3 |
Toronto |
2.2 |
Frankfurt |
2 |
Bombay |
1.5 |
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Related Topics
Words
- actually = really
- affect = influence
- agreement = if two people, companies or countries promise to do something
- annual = yearly
- attend = go to
- average =usual, normal
- bankrupt = if you don’t have enough money to pay back banks and the money you have borrowed from other people
- billion = one thousand million
- board of directors =group of people in accompany who make the important decisions
- bond = a document that promises that a company or the government will pay back money to you
- bondholder = a person who owns bonds
- broker = someone who buys and sells things like shares of a company to other people
- brokerage house = a company of brokers
- business = company
- cautious = careful
- certain =special
- charge =attack; move forward very quickly
- collapse = break down
- concentrated = here: happens
- constantly = the whole time
- continue = to go on
- contract = a written paper between two people or companies
- corporation = a very big company
- crash = here: the collapse of the whole system
- crop = a plant like wheat or corn that farmers grow for food
- decision =a choice you make after you discuss something
- depend =something is affected by something else
- develop =grow
- dividend = part of a company’s yearly profit that is divided up among shareholders
- economy =the system of buying and selling of goods in a country
- execute = to do, carry out
- expand = grow
- government = people who rule a country
- Great Depression = the time after the stock market crash; the 1930s in which people lost jobs in the US and in most European countries
- handle = deal with
- huge = very big
- index , indices = list of prices at the stock exchange
- interest = the extra money that you must pay back when you borrow something
- issue = the right to produce shares
- lay = system of rules that a country has
- lend = to give for a short time
- limited liability = you only pay a certain amount if something happens to you or your company – you don’t have to pay all of it
- list = here: to be in a directory
- little = not very much
- major = important
- national stock = shares of a company that is in your own country
- option = the right to buy shares at a special price with in a certain time
- order =if someone asks you to buy or sell something
- own =have, possess
- owner = a person who something belongs to
- ownership =if you have or possess something
- present =show
- profit = the money you get when you sell things, after you have paid for your costs
- promise = to say that you will do something
- protect =defend, guard
- right =something that you are officially allowed to have or do
- rise = to go up
- share = a part of the ownership of a company
- shareholder = a person who owns shares of a company
- stock = a share or part of a company
- stock exchange = place where you trade stocks and bonds
- stock ticker = a special machine that prints the price of company stocks
- stockbroker = a person who buys and trades stock and bonds for other people
- throughout = in all of
- trade = to buy and sell goods
- trading desk = the place at the stock exchange where the trading takes place
- value = what something is worth
- voting right = the right to vote
- whereas =while, but