What is the Stock Market? [and its Weird Beginning]
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What is the Stock Market? [and its Weird Beginning]


Do you know how the stock market works? What is the stock market and how does your
cash get converted into shares of stock? In this video, I’ll share the weird birth
of Wall Street along with how it really works when you buy or sell shares. We’re talking everything stock market today
on Let’s Talk Money! Beat debt. Make money. Make your money work for you. Creating the financial future you deserve. Let’s Talk Money. Hey Bowtie Nation, Joseph Hogue with the Let’s
Talk Money channel. A special shout-out to all you in the nation,
thank you for spending a part of your day here. If you’re not part of the community yet,
just click that little red subscribe button. It’s free and you’ll never miss an episode. We talk about investing in the stock market
a lot on the channel, but do you really know what that means? What happens when you click buy on your favorite
investing site and who are the people handling your money? How does your cash get converted into beautiful
shares of the Joseph Hogue corporation? Ah, so beautiful. I’ve worked in the industry for nearly two
decades, first as a venture capital analyst and investment analyst, then for private wealth
customers, and what I’ve seen of the market will shock you. In this video, I’ll show you some crazy
stock market history, the weird birth of Wall Street as well as how today’s stock market
really works. Now I’m mostly going to talk about the U.S.
stock market…because I’m an asshole American that thinks the world revolves around me. I’m ok with that and honestly, most stock
markets work the same anyway. The first stock market was in Amsterdam in
the early 1600s. Europeans were binging on spices from India
but it was hugely expensive to compete which meant sending dozens of ships, building ports
and fighting pirates. The result was the United East India Company
or the Vereenigde Nederlandsche Geoc…the VOC for short. The company was set up to sell shares that
would pay a dividend but would be dissolved after 21 years and that investors could sell
their shares after 10 years. The company was so successful that they decided
after the 10 years that it wouldn’t be dissolved so investors needed some way to buy in and
sell out of their shares. That created the need for a formal place to
exchange information and the stock sales. Fast forward about 50 years and it’s the
Dutch again that created Wall Street in America…except it’s not the Wall Street you’re thinking
of. After the wars with England, Dutch settlers
in Manhattan, then called New Amsterdam, built a wooden wall along the southern tip of the
island. The wall stood nine feet tall and went 2,300
feet from the corner of Wall and Pearl to what is now Broad and Wall Street. The wall was taken down in 1699 but nearly
100 years later, stock traders started grouping daily to trade under the Buttonwood tree at
the corner of Wall Street. Anyone that wasn’t a formal member of the
group that wanted to buy or sell shares had to work through a broker…and the stock market
was born. Now let’s look at how today’s stock market
works, how it works when you buy or sell stocks, the players involved and some myths about
investing. First though, a fun little pop quiz here. Which do you think is the most heavily traded
asset class in the world? So between stocks, bonds, currencies, gold
and commodities, which do you think has the highest trading volume each day? Put your answer in the comments below. I’ll update the first comment in a week
with the answer. So the stock market can mean different things. It can mean the physical or electronic exchange,
a location where stocks are traded, like we’ll talk about now. A stock market can also mean the idea of the
stocks in the market. So here we’re talking about indexes, sectors
and other ways to group stocks. Let’s first look at how the stock exchange
works and then talk about the market. The stock market is like an auction house
where there’s no set price for stocks until buyers and sellers find one. Companies issue ownership through shares in
an initial public offering, or IPO, where public investors get their first chance to
buy in. An important fact here about buying and selling
stocks, after the IPO that first time the company issues shares on the market, after
that, the company takes no part in the shares. It doesn’t make any money on the shares
again. This is why the stock market is called a secondary
market, where buyers and sellers can trade their investments. Other than when a company buys its shares
back or rarely issues more shares, it has nothing to do with the buying or selling and
makes no money off it. Buying stocks gives you an actual ownership
of the company and most shares have voting rights for company shareholder meetings. The problem here is that even a few hundred
thousand shares may only be a fractional percentage of the company so most investors really aren’t
going to control much of the decision-making. For example, at a market value over $1 trillion,
you would need to own $10 billion in shares of Apple to control just 1% of the voting
rights. Besides the New York Stock Exchange on Wall
Street, there are other exchanges like the Philadelphia Stock Exchange, the Chicago Mercantile
Exchange where they trade commodities like oil, corn and gold and the Nasdaq which a
wholly computerized exchange. All stocks have a bid price, the price buyers
are willing to pay, and an ask price which is the price sellers are willing to accept. A transaction only occurs when one of the
prices meets the other or when someone places a market order. That’s when you tell the investing platform
to buy you shares at the current ask price or to sell your shares at the current bid. But what actually happens when you click that
button to buy or sell your shares? What’s the process and how does it work? Most exchanges run electronically anymore
but there are still some physical exchanges and open outcry. In the good ol’ days, your order would go
through a broker. These are licensed and regulated dealers with
membership on the stock exchange. The broker would receive your order along
with all the other orders from investors, and send a message down to one of their floor
traders to buy or sell. The floor trader would then go to the place
on the exchange where that particular stock is traded and would transact the order. This brings us to probably one of the least
understood players in the market but one that’s absolutely critical. Market makers are the employees of a large
bank or investment firm that are contractually obligated to buy or sell a specific stock. This person has a spot on the exchange that
is designated for that stock and where all the traders know they can go to buy or sell. The market maker has an obligation to buy
or sell the shares if there is anyone that wants to take the other side. For example, if a trader comes up and wants
to sell 100 shares of Microsoft, the market maker has to buy the shares if there are no
other traders there to buy. Now of course, the market maker sets their
price depending on other orders as well as supply and demand. They set a fair bid and ask price for their
own book, the bank’s ownership in that stock, and adjust it up or down depending on the
news. All this makes sure there is always trading
available in a stock. Without market makers, and especially in times
of big news or uncertainty, there might not be anyone that wants the other side to your
buy or sell order. Market makers help keep stocks trading even
in the face of big, price-changing news. That’s how the market works but when most
people talk about the Stock Market, they’re thinking of the idea of the market. Their talking about an index like the S&P
500 which is just a group of the 500 largest publicly traded companies in the United States,
a group that is supposed to represent the entire market of shares. Another index is the Nasdaq listing of mostly
tech and biotech stocks which is also an electronic exchange. Click on the video to the right for what I
call the biggest investing lie since Bernie Madoff, the price-to-earnings ratio. Why this is the worst investing rule you can
follow and why the media wants you to use it. Don’t forget to join the Let’s Talk Money
community by tapping that subscribe button and clicking the bell notification.

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