what is the stock market essay

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What Is the Stock Market?

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Stock market definition

The stock market is where investors buy and sell shares of companies. It’s a set of exchanges where companies issue shares and other securities for trading. It also includes over-the-counter (OTC) marketplaces where investors trade securities directly with each other (rather than through an exchange).

The stock market explained

In practice, the term "stock market" often refers to one of the major stock market indexes, such as the Dow Jones Industrial Average or the S&P 500 . These represent large sections of the stock market. Because it's hard to track every single company, the performance of the indexes is viewed as representative of the entire market.

You might see a news headline that says the stock market has moved lower or that the stock market has closed up or down for the day. This often means stock market indexes have moved up or down, and stocks within the index have gained or lost value. Investors who buy and sell stocks hope to profit through this movement in stock prices.

» Need to back up a bit? Read our explainer on stocks

How the market works

When you purchase a public company's stock, you're buying a small piece of that company.

The stock market works through a network of exchanges — you may have heard of the New York Stock Exchange or the Nasdaq. Companies list shares of their stock on an exchange through a process called an initial public offering, or IPO . Investors purchase those shares, which allows the company to raise money to grow its business. Investors can then buy and sell these stocks among themselves.

Buyers offer a “bid,” or the highest amount they’re willing to pay, usually lower than the amount sellers “ask” for in exchange. This difference is called the bid-ask spread. For a trade to occur, a buyer needs to increase his price, or a seller needs to decrease hers.

Computer algorithms generally do most price-setting calculations. You’ll see the bid, ask, and bid-ask spread on your broker's website when buying stock. In many cases, the difference will be pennies and not much concern for beginner and long-term investors.

The U.S. Securities and Exchange Commission regulates the stock market, and the SEC’s mission is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."

Historically, stock trades likely took place in a physical marketplace. These days, the stock market works electronically through online stockbrokers. Each trade happens on a stock-by-stock basis, but overall stock prices often move in tandem because of news, political events, economic reports and other factors.

» Learn more: How to invest in stocks

What is the point of the stock market?

The point of the stock market is to provide a place where anyone can buy and sell fractional ownership in a publicly traded company. It distributes control of some of the world’s largest companies among hundreds of millions of individual investors. And the buying and selling decisions of those investors determine the value of those companies.

The market lets buyers and sellers negotiate prices. This negotiation process maximizes fairness for both parties by providing both the highest possible selling price and the lowest possible buying price at a given time. Each exchange tracks the supply and demand of stocks listed there.

Supply and demand help determine the price for each security, or the levels at which stock market participants — investors and traders — are willing to buy or sell. This process is called price discovery, and it’s fundamental to how the market works. Price discovery plays an important role in determining how new information affects the value of a company.

For example, imagine a publicly traded company with a market capitalization (market value) of $1 billion and trades at a share price of $20.

Suppose a larger company announces a deal to acquire the smaller company for $2 billion, pending regulatory approval. If the deal goes through, it would represent a doubling of the company’s value. However, investors might want to prepare for regulators blocking the deal.

If the deal seems like a sure thing, sellers might raise their asks to $40, and buyers might increase their bids to meet those asks. But if there’s a chance the deal won’t be approved, buyers might only be willing to offer bids of $30. If they’re very pessimistic about the deal’s chances, they might keep their bids at $20.

In this way, the market can determine how a complicated piece of new information — a takeover deal that might not go through — should affect the company’s market value.

» See NerdWallet's list of the best online stock brokers for beginners

What is the stock market doing today?

Investors often track the stock market's performance by looking at a broad market index like the S&P 500 or the DJIA. The chart below shows the current performance of the stock market — as measured by the S&P 500's closing price on the most recent trading day — and the S&P 500's historical performance since 1990.

Stock market data may be delayed up to 20 minutes, and is intended solely for informational purposes, not for trading purposes.

What is stock market volatility?

Investing in the stock market does come with risks, but with the right investment strategies, it can be done safely with minimal risk of long-term losses. Day trading, which requires rapidly buying and selling stocks based on price swings, is extremely risky. Conversely, investing in the stock market for the long term has proven to be an excellent way to build wealth over time.

For example, the S&P 500 has a historical average annualized total return of about 10% before adjusting for inflation. However, the market will rarely provide that return on a year-to-year basis. In some years, the stock market could end down significantly, while in others, it could go up tremendously. These large swings are due to market volatility or periods when stock prices rise and fall unexpectedly.

If you’re actively buying and selling stocks, there’s a good chance you’ll get it wrong at some point, buying or selling at the wrong time, resulting in a loss. The key to investing safely is to stay invested — through the ups and the downs — in low-cost index funds that track the whole market so that your returns might mirror the historical average.

How do you invest in the stock market?

You’ll usually buy stocks online between 9:30 AM and 4 PM ET through the stock market, which anyone can access with a brokerage account , robo-advisor or employee retirement plan. Investing outside of these hours is called premarket trading or after-hours trading and carries additional risks.

You don’t have to officially become an “investor” to invest in the stock market — for the most part, it’s open to anyone.

If you have a 401(k) through your workplace, you may already be invested in the stock market. Mutual funds, often composed of stocks from many different companies, are common in 401(k)s.

You can purchase individual stocks through a brokerage account or an individual retirement account like an IRA . Once you open and fund an account with an online broker, you can begin to buy and sell investments. The broker acts as the middleman between you and the stock exchanges.

Online brokerages have made the signup process simple, and once you fund the account, you can take your time selecting the right investments for you.

With any investment, there are risks. But stocks carry more risk — and more potential for reward — than some other securities. While the market's history of gains suggests that a diversified stock portfolio will increase in value over time, stocks also experience sudden dips.

To build a diversified portfolio without purchasing many individual stocks, you can invest in a type of mutual fund called an index fund or an exchange-traded fund. These funds aim to passively mirror the performance of an index by holding all of the stocks or investments in that index. For example, you can invest in the DJIA, the S&P 500 and other market indexes through index funds and ETFs.

Stocks and stock mutual funds are ideal for a long time horizon — like retirement — but unsuitable for a short-term investment (generally defined as money you need for an expense within five years). With a short-term investment and a hard deadline, there's a greater chance you'll need that money back before the market has had time to recover losses.

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Home — Essay Samples — Economics — Stock Market — The Significance of the Stock Market: History, Function, and Future

The Significance of The Stock Market: History, Function, and Future

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Published: Jan 30, 2024

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Table of contents

History of the stock market, structure and function of the stock market, factors affecting the stock market, benefits and risks of investing in the stock market, strategies for successful stock market investing, the stock market and the economy, challenges and future of the stock market.

• Bodie, Z., Kane, A., & Marcus, A. (2014). Investments . McGraw Hill Education.
• Graham, B., & Dodd, D. (2010). Security Analysis: The Classic 1934 Edition . McGraw-Hill Professional.
• Malkiel, B. G. (2015). A random walk down Wall Street: The time-tested strategy for successful investing . WW Norton & Company.
• Shiller, R. J. (2017). Irrational Exuberance . Princeton University Press.
• Investopedia. (2021). The Stock Market: A Beginner's Guide . Retrieved from https://www.investopedia.com/articles/basics/06/savinginvesting.asp

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Do fundamentals—or emotions—drive the stock market?

There’s never been a better time to be a behaviorist. During four decades, the academic theory that financial markets accurately reflect a stock’s underlying value was all but unassailable. But lately, the view that investors can fundamentally change a market’s course through irrational decisions has been moving into the mainstream.

With the exuberance of the high-tech stock bubble and the crash of the late 1990s still fresh in investors’ memories, adherents of the behaviorist school are finding it easier than ever to spread the belief that markets can be something less than efficient in immediately distilling new information and that investors, driven by emotion, can indeed lead markets awry. Some behaviorists would even assert that stock markets lead lives of their own, detached from economic growth and business profitability. A number of finance scholars and practitioners have argued that stock markets are not efficient—that is, that they don’t necessarily reflect economic fundamentals. 1 1. For an overview of behavioral finance, see Jay R. Ritter, “Behavioral finance,” Pacific-Basin Finance Journal , 2003, Volume 11, Number 4, pp. 429–37; and Nicholas Barberis and Richard H. Thaler, “A survey of behavioral finance,” in Handbook of the Economics of Finance: Financial Markets and Asset Pricing , G. M. Constantinides et al. (eds.), New York: Elsevier North-Holland, 2003, pp. 1054–123. According to this point of view, significant and lasting deviations from the intrinsic value of a company’s share price occur in market valuations.

The argument is more than academic. In the 1980s the rise of stock market index funds, which now hold some $1 trillion in assets, was caused in large part by the conviction among investors that efficient-market theories were valuable. And current debates in the United States and elsewhere about privatizing Social Security and other retirement systems may hinge on assumptions about how investors are likely to handle their retirement options.

We agree that behavioral finance offers some valuable insights—chief among them the idea that markets are not always right, since rational investors can’t always correct for mispricing by irrational ones. But for managers, the critical question is how often these deviations arise and whether they are so frequent and significant that they should affect the process of financial decision making. In fact, significant deviations from intrinsic value are rare, and markets usually revert rapidly to share prices commensurate with economic fundamentals. Therefore, managers should continue to use the tried-and-true analysis of a company’s discounted cash flow to make their valuation decisions.

When markets deviate

Behavioral-finance theory holds that markets might fail to reflect economic fundamentals under three conditions. When all three apply, the theory predicts that pricing biases in financial markets can be both significant and persistent.

Irrational behavior. Investors behave irrationally when they don’t correctly process all the available information while forming their expectations of a company’s future performance. Some investors, for example, attach too much importance to recent events and results, an error that leads them to overprice companies with strong recent performance. Others are excessively conservative and underprice stocks of companies that have released positive news.

Systematic patterns of behavior. Even if individual investors decided to buy or sell without consulting economic fundamentals, the impact on share prices would still be limited. Only when their irrational behavior is also systematic (that is, when large groups of investors share particular patterns of behavior) should persistent price deviations occur. Hence behavioral-finance theory argues that patterns of overconfidence, overreaction, and overrepresentation are common to many investors and that such groups can be large enough to prevent a company’s share price from reflecting underlying economic fundamentals—at least for some stocks, some of the time.

Limits to arbitrage in financial markets. When investors assume that a company’s recent strong performance alone is an indication of future performance, they may start bidding for shares and drive up the price. Some investors might expect a company that surprises the market in one quarter to go on exceeding expectations. As long as enough other investors notice this myopic overpricing and respond by taking short positions, the share price will fall in line with its underlying indicators.

This sort of arbitrage doesn’t always occur, however. In practice, the costs, complexity, and risks involved in setting up a short position can be too high for individual investors. If, for example, the share price doesn’t return to its fundamental value while they can still hold on to a short position—the so-called noise-trader risk—they may have to sell their holdings at a loss.

Momentum and other matters

Two well-known patterns of stock market deviations have received considerable attention in academic studies during the past decade: long-term reversals in share prices and short-term momentum.

First, consider the phenomenon of reversal—high-performing stocks of the past few years typically become low-performing stocks of the next few. Behavioral finance argues that this effect is caused by an overreaction on the part of investors: when they put too much weight on a company’s recent performance, the share price becomes inflated. As additional information becomes available, investors adjust their expectations and a reversal occurs. The same behavior could explain low returns after an initial public offering (IPO), seasoned offerings, a new listing, and so on. Presumably, such companies had a history of strong performance, which was why they went public in the first place.

Momentum, on the other hand, occurs when positive returns for stocks over the past few months are followed by several more months of positive returns. Behavioral-finance theory suggests that this trend results from systematic underreaction: overconservative investors underestimate the true impact of earnings, divestitures, and share repurchases, for example, so stock prices don’t instantaneously react to good or bad news.

But academics are still debating whether irrational investors alone can be blamed for the long-term-reversal and short-term-momentum patterns in returns. Some believe that long-term reversals result merely from incorrect measurements of a stock’s risk premium, because investors ignore the risks associated with a company’s size and market-to-capital ratio. 2 2. Eugene F. Fama and Kenneth R. French, “Multifactor explanations of asset pricing anomalies,” Journal of Finance , 1996, Volume 51, Number 1, pp. 55–84. These statistics could be a proxy for liquidity and distress risk.

Similarly, irrational investors don’t necessarily drive short-term momentum in share price returns. Profits from these patterns are relatively limited after transaction costs have been deducted. Thus, small momentum biases could exist even if all investors were rational.

Furthermore, behavioral finance still cannot explain why investors overreact under some conditions (such as IPOs) and underreact in others (such as earnings announcements). Since there is no systematic way to predict how markets will respond, some have concluded that this is a further indication of their accuracy. 3 3. Eugene F. Fama, “Market efficiency, long-term returns, and behavioral finance,” Journal of Financial Economics , 1998, Volume 49, Number 3, pp. 283–306.

Persistent mispricing in carve-outs and dual-listed companies

Two well-documented types of market deviation—the mispricing of carve-outs and of dual-listed companies—are used to support behavioral-finance theory. The classic example is the pricing of 3Com and Palm after the latter’s carve-out in March 2000.

In anticipation of a full spin-off within nine months, 3Com floated 5 percent of its Palm subsidiary. Almost immediately, Palm’s market capitalization was higher than the entire market value of 3Com, implying that 3Com’s other businesses had a negative value. Given the size and profitability of the rest of 3Com’s businesses, this result would clearly indicate mispricing. Why did rational investors fail to exploit the anomaly by going short on Palm’s shares and long on 3Com’s? The reason was that the number of available Palm shares was extremely small after the carve-out: 3Com still held 95 percent of them. As a result, it was extremely difficult to establish a short position, which would have required borrowing shares from a Palm shareholder.

During the months following the carve-out, the mispricing gradually became less pronounced as the supply of shares through short sales increased steadily. Yet while many investors and analysts knew about the price difference, it persisted for two months—until the Internal Revenue Service formally approved the carve-out’s tax-free status in early May 2002. At that point, a significant part of the uncertainty around the spin-off was removed and the price discrepancy disappeared. This correction suggests that at least part of the mispricing was caused by the risk that the spin-off wouldn’t occur.

Additional cases of mispricing between parent companies and their carved-out subsidiaries are well documented. 4 4. Owen A. Lamont and Richard H. Thaler, “Can the market add and subtract? Mispricing in tech stock carve-outs,” Journal of Political Economy , 2003, Volume 111, Number 2, pp. 227–68; and Mark L. Mitchell, Todd C. Pulvino, and Erik Stafford, “Limited arbitrage in equity markets,” Journal of Finance , 2002, Volume 57, Number 2, pp. 551–84. In general, these cases involve difficulties setting up short positions to exploit the price differences, which persist until the spin-off takes place or is abandoned. In all cases, the mispricing was corrected within several months.

A second classic example of investors deviating from fundamentals is the price disparity between the shares of the same company traded on two different exchanges. Consider the case of Royal Dutch Petroleum and “Shell” Transport and Trading, which are traded on the Amsterdam and London stock markets, respectively. Since these twin shares are entitled to a fixed 60–40 portion of the dividends of Royal Dutch/Shell, you would expect their share prices to remain in this fixed ratio.

Over long periods, however, they have not. In fact, prolonged periods of mispricing can be found for several similar twin-share structures, such as Unilever (Exhibit 1). This phenomenon occurs because large groups of investors prefer (and are prepared to pay a premium for) one of the twin shares. Rational investors typically do not take positions to exploit the opportunity for arbitrage.

Price disparity in twin shares

Thus in the case of Royal Dutch/Shell, a price differential of as much as 30 percent has persisted at times. Why? The opportunity to arbitrage dual-listed stocks is actually quite unpredictable and potentially costly. Because of noise-trader risk, even a large gap between share prices is no guarantee that those prices will converge in the near term.

Does this indict the market for mispricing? We don’t think so. In recent years, the price differences for Royal Dutch/Shell and other twin-share stocks have all become smaller. Furthermore, some of these share structures (and price differences) disappeared because the corporations formally merged, a development that underlines the significance of noise-trader risk: as soon as a formal date was set for definitive price convergence, arbitrageurs stepped in to correct any discrepancy. This pattern provides additional evidence that mispricing occurs only under special circumstances—and is by no means a common or long-lasting phenomenon.

Markets and fundamentals: The bubble of the 1990s

Do markets reflect economic fundamentals? We believe so. Long-term returns on capital and growth have been remarkably consistent for the past 35 years, in spite of some deep recessions and periods of very strong economic growth. The median return on equity for all US companies has been a very stable 12 to 15 percent, and long-term GDP growth for the US economy in real terms has been about 3 percent a year since 1945. 5 5. US corporate earnings as a percentage of GDP have been remarkably constant over the past 35 years, at around 6 percent. We also estimate that the inflation-adjusted cost of equity since 1965 has been fairly stable, at about 7 percent. 6 6. Marc H. Goedhart, Timothy M. Koller, and Zane D. Williams, “ The real cost of equity ,” McKinsey on Finance , Number 5, Autumn 2002, pp. 11–5.

We used this information to estimate the intrinsic P/E ratios for the US and UK stock markets and then compared them with the actual values. 7 7. Marc H. Goedhart, Timothy M. Koller, and Zane D. Williams, “ Living with lower market expectations ,” McKinsey on Finance , Number 8, Summer 2003, pp. 7–11. This analysis has led us to three important conclusions. The first is that US and UK stock markets, by and large, have been fairly priced, hovering near their intrinsic P/E ratios. This figure was typically around 15, with the exception of the high-inflation years of the late 1970s and early 1980s, when it was closer to 10 (Exhibit 2).

Returning to intrinsic valuation

Second, the late 1970s and late 1990s produced significant deviations from intrinsic valuations. In the late 1970s, when investors were obsessed with high short-term inflation rates, the market was probably undervalued; long-term real GDP growth and returns on equity indicate that it shouldn’t have bottomed out at P/E levels of around 7. The other well-known deviation occurred in the late 1990s, when the market reached a P/E ratio of around 30—a level that couldn’t be justified by 3 percent long-term real GDP growth or by 13 percent returns on book equity.

Third, when such deviations occurred, the stock market returned to its intrinsic-valuation level within about three years. Thus, although valuations have been wrong from time to time—even for the stock market as a whole—eventually they have fallen back in line with economic fundamentals.

Focus on intrinsic value

What are the implications for corporate managers? Paradoxically, we believe that such market deviations make it even more important for the executives of a company to understand the intrinsic value of its shares. This knowledge allows it to exploit any deviations, if and when they occur, to time the implementation of strategic decisions more successfully. Here are some examples of how corporate managers can take advantage of market deviations.

Issuing additional share capital when the stock market attaches too high a value to the company’s shares relative to their intrinsic value

Repurchasing shares when the market underprices them relative to their intrinsic value

Paying for acquisitions with shares instead of cash when the market overprices them relative to their intrinsic value

Divesting particular businesses at times when trading and transaction multiples are higher than can be justified by underlying fundamentals

Bear two things in mind. First, we don’t recommend that companies base decisions to issue or repurchase their shares, to divest or acquire businesses, or to settle transactions with cash or shares solely on an assumed difference between the market and intrinsic value of their shares. Instead, these decisions must be grounded in a strong business strategy driven by the goal of creating shareholder value. Market deviations are more relevant as tactical considerations when companies time and execute such decisions—for example, when to issue additional capital or how to pay for a particular transaction.

Second, managers should be wary of analyses claiming to highlight market deviations. Most of the alleged cases that we have come across in our client experience proved to be insignificant or even nonexistent, so the evidence should be compelling. Furthermore, the deviations should be significant in both size and duration, given the capital and time needed to take advantage of the types of opportunities listed previously.

Provided that a company’s share price eventually returns to its intrinsic value in the long run, managers would benefit from using a discounted-cash-flow approach for strategic decisions. What should matter is the long-term behavior of the share price of a company, not whether it is undervalued by 5 or 10 percent at any given time. For strategic business decisions, the evidence strongly suggests that the market reflects intrinsic value.

Marc Goedhart is an associate principal in McKinsey’s Amsterdam office, and Tim Koller is a principal in the New York office. David Wessels , an alumnus of the New York office, is an adjunct professor of finance at the Wharton School of the University of Pennsylvania. This article is adapted from Tim Koller, Marc Goedhart, and David Wessels, Valuation: Measuring and Managing the Value of Companies , fourth edition, Hoboken, New Jersey: John Wiley & Sons, 2005.

This article was first published in the Spring 2005 issue of McKinsey on Finance . Visit McKinsey’s corporate finance site to view the full issue.

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Essay: WHAT MAKES THE STOCK MARKET GO UP--AND DOWN

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FROM its inception, the stock market was meant to be a place where businessmen could raise capital by selling shares in their enterprises, and where investors could turn a profit when those enterprises prospered. The market still serves both purposes, but today it is judged less by what it does for businessmen seeking capital than by what it accomplishes for investors seeking gain.

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Essay: Stock markets

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Stock markets play a vital part towards the economy of a country. The stock market most important role is supporting the growth of the industry and commerce in the country eventually affects the economy of the country to a great extent. That is the reason that a rising stock market is the sign of a developing industrial sector and a growing economy of the country. Thus, the government, industry and even the central banks of the country must keep a close watch on the happenings of the stock market. The stock market is important from both the industry’s point of view as well as the investor’s point of view. History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on the control and behavior of the stock market and, in general, on the smooth operation of financial system functions. Financial stability is the raison d’??tre of central banks. History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. In the stock market, investor objective is to maximize the portfolio’s expected return and minimize the risk. Return is an amount of revenue an investment generates over a given period of time as percentage of the amount of capital invested. The stock market plays a play a pivotal role in the growth of the industry and commerce of the country that eventually affects the economy of the country to a great extent. That is reason that the government, industry and even the central banks of the country keep a close watch on the happenings of the stock market. The stock market is important from both the industry’s point of view as well as the investor’s point of view. In prospects of overall economy, stock market makes it possible for the economy to ensure long-term commitments in real capital. For that reason, level of efficiency measurement of the stock market is very important to the markets players, who ensure long-term real capital in an economy. Since stock market returns are subject to fluctuations, it is essential to determine the forces influencing the stock returns for efficient functioning and development of the stock market and Country. Over the past few decades, numerous studies have been done to find out the relationships between conventional stock returns and macroeconomic variables especially for developed markets. However, regional Islamic stock markets such as Malaysia and Indonesia have not been fully explored because of their small sizes and geographic locations. Therefore, this study attempts to fill this gap by exploring the effect of macroeconomic variables toward the Islamic stock returns in Malaysia and Indonesia. Therefore, the researcher have chosen five macroeconomic variables including gross domestic products, money supply, exchange rate, interest rate and industrial production index to examine the variables with the stock prices. Indeed, there are other variables that affect stock prices but the researcher limit the discussion on these variables because of efficiency in modelling as incorporating many variables result in loss of degree of freedom.

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Essay on Stock Market

Students are often asked to write an essay on Stock Market in their schools and colleges. And if you’re also looking for the same, we have created 100-word, 250-word, and 500-word essays on the topic.

Let’s take a look…

100 Words Essay on Stock Market

What is the stock market.

The stock market is a place where stocks are bought and sold. A stock is a share of ownership in a company. When you buy a stock, you are becoming a part-owner of that company.

How Does the Stock Market Work?

The stock market is a complex system, but the basic idea is that buyers and sellers come together to agree on a price for a stock. The price of a stock is determined by supply and demand. When there are more buyers than sellers, the price of the stock goes up. When there are more sellers than buyers, the price of the stock goes down.

Why Do People Invest in Stocks?

People invest in stocks for a variety of reasons. Some people invest to make money. They buy stocks that they believe will go up in value, and then they sell them for a profit. Other people invest to save for retirement. They buy stocks that they believe will provide them with a steady income in the future.

Risks of Investing in Stocks

Investing in stocks is not without risk. The value of stocks can go down as well as up. This means that you could lose money if you invest in stocks. However, over the long term, the stock market has historically provided a good return on investment.

250 Words Essay on Stock Market

What is a stock market.

A stock market is a place where people buy and sell shares of companies. When you buy a share of a company, you are essentially becoming a part-owner of that company. The value of your share will go up if the company does well, and it will go down if the company does poorly.

How Does a Stock Market Work?

Stock markets are typically regulated by government agencies. These agencies set rules and regulations to ensure that the markets are fair and orderly. When you buy or sell a share of stock, you do so through a stockbroker. Stockbrokers are licensed professionals who help investors buy and sell stocks.

Why Invest in the Stock Market?

There are many reasons why people invest in the stock market. Some people invest to make money, while others invest to save for retirement or to build wealth for their families. The stock market can be a volatile place, but over the long term, it has historically been a good investment.

Risks of Investing in the Stock Market

There are also risks associated with investing in the stock market. The value of your investments can go down as well as up, and you could lose money. It is important to understand the risks involved before you invest in the stock market.

The stock market can be a complex and confusing place, but it can also be a rewarding one. If you are considering investing in the stock market, it is important to do your research and understand the risks involved. You should also consider seeking the help of a financial advisor.

500 Words Essay on Stock Market

A stock market is a place where people can buy and sell stocks. Stocks are pieces of ownership in a company. When you buy a stock, you are essentially becoming a part-owner of that company. Companies issue stocks to raise money to grow their business.

The stock market is a regulated marketplace where buyers and sellers of stocks can come together to trade. The price of a stock is determined by supply and demand. When there are more people who want to buy a stock than there are people who want to sell it, the price goes up. When there are more people who want to sell a stock than there are people who want to buy it, the price goes down.

Types of Stock Markets

There are two main types of stock markets: primary and secondary. In a primary market, companies sell stocks to investors for the first time. In a secondary market, investors buy and sell stocks that have already been issued.

Benefits of Stock Market

The stock market can be a great way to grow your wealth over time. When companies do well, their stock prices go up, and you can sell your stocks for a profit. The stock market can also be a good way to save for retirement.

Risks of Stock Market

The stock market is not without its risks. Stock prices can go down as well as up, and you could lose money if you sell your stocks at a lower price than you paid for them. It is important to do your research before you invest in any stock.

How to Invest in Stock Market

If you are interested in investing in the stock market, there are a few things you need to do first. You need to open a brokerage account, which is an account that allows you to buy and sell stocks. You also need to learn about the different types of stocks and how to analyze them. Once you have done your research, you can start investing in stocks.

The stock market can be a great way to grow your wealth over time, but it is important to understand the risks involved before you invest. If you do your research and invest wisely, you can increase your chances of success.

That’s it! I hope the essay helped you.

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Influence of Stock Market Changes Essay

The issuing of shares of stock might help many small organizations to receive a high reputation for a short period of time, and make sure that they will have a stable development in the future. When businesses become public, they can make their initial public offering (IPO) and increase the general efficiency of the stock market (Colak et al., 2017). In some cases, the decrease or increase in public shares can influence the stock market in both positive and negative ways, but sometimes this sphere does not feel any significant changes, and the efficiency level stays the same.

For instance, during the pandemic, many businesses in the world experienced financial problems that did not allow them to take an active part in the stock market and issue shares. Many important areas of life like healthcare, real estate, and entertainment were not able to provide enough funding to maintain the previous level of the stock market (Mazur et al., 2021). The restrictions issues during COVID-19 limited people’s activities and interests, which they had before. Consequently, less money was integrated into the support of such public businesses as charities, cinemas, cafes, and many other areas which are not basic but bring a high level of happiness to people. The incomes of many organizations went down because of this global problem, and they were not able to make public funding to maintain the position of the stock market.

However, several organizations could mention that their income increased during the pandemic. These companies were mostly oriented on the internet planforms and delivery services at high demand during harsh lockdowns. Moreover, the percentage of funding from oil companies has always been high, and they had to create new strategies to maintain the stock market, which might be destroyed without their help. Companies, which are creating shares to increase the working flow of the stock market, usually make strategic plans for their development to make sure that businesses stand out in the competition (Adam et al., 2016). One of the solutions could be the start of integration into the African market as the affection of COVID-19 was not strong in the early stages (Ikechukwu & Omotayo, 2019). Consequently, the market stock level was saved and stayed relatively stable due to oil companies’ shares production, which did not see a huge decrease in their profit.

The efficiency of the stock market is presented differently in many countries. Every business should understand how an initial public offering should be made to make sure that it does not harm the inner system of the business and help with money flow in the market. Prediction of the future changes is also an important part of the decision-making when an organization wants to become public and issue shares as the modern environment does not have a stable trend. Following the latest trends in technologies might help create stability and a high level of efficiency in the stock market.

In conclusion, unpredicted life changes might influence the stock market in different ways, and when businesses are prepared for these quick changes, the outcomes will not be negative. On the example of the global pandemics, not all public businesses mentioned a decrease in profit and an inability to invest in the stock market. Some of them even managed to save the relatively high level of issues shares. Therefore, predictions of the future protect the stock market from the decrease in the efficiency level.

Adam, K., Marcet, A. and Nicolin, J. P. (2016). Stock market volatility and learning . The Journal of Finance, 71 (1), 33-82.

Colak, G., Durnev, A. and Qian, Y. (2017). Political uncertainty and IPO activity: Evidence from U.S. gubernatorial elections. Journal of Financial and Quantitative Analysis, 52 (6). 2523-2564.

Ikechukwu, K. and Omotayo, M. (2019). The impact of changes in oil price on stock market: Evidence from Africa. International Journal of Management, Economics and Social Sciences, 8 (3), 169-194. doi:10.32327/IJMESS/8.3.2019.11.

Mazur, M., Dang, M. and Vega, M. (2021). COVID-19 and the march 2020 stock market crash . Evidence from S&P1500. Finance Research Letters, 38 .

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What Are Stocks?

Understanding stocks.

• Stockholders & Equity Ownership
• Comparing Common & Preferred Stock
• Stocks vs. Bonds

The Bottom Line

• Trading Skills

Stocks: What They Are, Main Types, How They Differ From Bonds

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Investopedia / Nez Riaz

A stock, also known as equity , is a security that represents the ownership of a fraction of the issuing corporation. Units of stock are called " shares " which entitles the owner to a proportion of the corporation's assets and profits equal to how much stock they own. 

Stocks are bought and sold predominantly on stock exchanges and are the foundation of many individual investors' portfolios. Stock trades have to conform to government regulations meant to protect investors from fraudulent practices.

Key Takeaways

• A stock is a form of security that indicates the holder has proportionate ownership in the issuing corporation and is sold predominantly on stock exchanges.
• Corporations issue stock to raise funds to operate their businesses.
• There are two main types of stock: common and preferred.
• Historically, stocks have outperformed most other investments over the long run.

Corporations issue stock to raise funds to operate their businesses and the holder of stock, a shareholder, may have a claim to part of the company's assets and earnings.

A shareholder is considered an owner of the issuing company, determined by the number of shares an investor owns relative to the number of outstanding shares . If a company has 1,000 shares of stock outstanding and one person owns 100 shares, that person would own and have a claim to 10% of the company's assets and earnings.

Stockholders do not  own  a corporation but corporations are a special type of organization because the law treats them as legal persons. Corporations file taxes. can borrow, can own property, and can be sued. The idea that a corporation is a “person” means that the corporation  owns its assets . A corporate office full of chairs and tables belongs to the corporation, and  not  to the shareholders.

Corporate property is legally separated from the property of shareholders, which limits the  liability  of both the corporation and the shareholder. If the corporation goes bankrupt, a judge may order all of its assets sold but a shareholder's assets are not at risk. The court cannot force you to sell your shares, although the value of your shares may have fallen. Likewise, if a major shareholder goes bankrupt, they cannot sell the company’s assets to pay their creditors .

Shareholder

A person, company, or institution that owns at least one share of a company's  stock .

What Is Shareholder Ownership?

What shareholders own are shares issued by the corporation, and the corporation owns the assets held by a firm. If you own 33% of the shares of a company, it is incorrect to assert that you own one-third of that company. However, you do own one-third of the company’s shares. This is known as the “separation of ownership and control.”

Owning stock gives you the right to vote in shareholder meetings, receive dividends if and when they are distributed, and the right to sell your shares to somebody else.

If you own a majority of shares, your voting power increases so that you can indirectly control the direction of a company by appointing its board of directors. This becomes most apparent when one company buys another. The acquiring company buys all the outstanding shares.

The board of directors is responsible for increasing the value of the corporation and often does so by hiring professional managers, or officers, such as the  chief executive officer , or CEO. Ordinary shareholders do not manage the company.

The importance of being a shareholder is that you are entitled to a portion of the company's profits, which is the foundation of a stock’s value. The more shares you own, the larger the portion of the profits you get. Many stocks, however, do not pay out  dividends and instead reinvest profits back into growing the company. These  retained earnings , however, are still reflected in the value of a stock.

Read about Investopedia's 10 Rules of Investing by picking up a copy of our special issue print edition.

How to Compare Common and Preferred Stock

There are two main types of stock: common and preferred . Common stock usually entitles the owner to vote at shareholders' meetings and to receive any dividends paid out by the corporation.

Preferred stockholders generally do not have  voting rights , though they have a higher claim on assets and earnings than common stockholders. For example, owners of preferred stock receive dividends before  common shareholders  and have priority if a company goes bankrupt and is liquidated.

The first common stock ever issued was by the Dutch East India Company in 1602.

Companies can issue new shares whenever there is a need to raise additional cash. This process dilutes the ownership and rights of existing shareholders (provided they do not buy any of the new offerings). Corporations can also engage in stock buybacks, which benefit existing shareholders because they cause their shares to appreciate in value.

What Is the Difference Between Stocks and Bonds?

Stocks are issued by companies to raise  capital to grow the business or undertake new projects. There are important distinctions between whether somebody buys shares directly from the company when it issues them in the  primary market or from another shareholder in the  secondary market . When the corporation issues shares, it does so in return for money.

Bonds vary from stocks in several ways. Bondholders are creditors to the corporation and are entitled to interest as well as repayment of the principal invested. Creditors are given legal priority over other stakeholders in the event of a bankruptcy and will be made whole first if a company is forced to sell assets .

Conversely, shareholders often receive nothing in the event of bankruptcy, implying that stocks are inherently riskier investments than bonds.

How Do You Buy Stock?

Most often, stocks are bought and sold on stock exchanges, such as the Nasdaq or the New York Stock Exchange (NYSE). After a company goes public through an initial public offering (IPO), its stock becomes available for investors to buy and sell on an exchange. Typically, investors will use a brokerage account to purchase stock on the exchange, which will list the purchasing price (the bid) or the selling price (the offer). The price of the stock is influenced by supply and demand factors in the market, among other variables.

How Can You Earn Income From Owning Stock?

There are two ways to earn money by owning shares of stock is through dividends and capital appreciation. Dividends are cash distributions of company profits. If a company has 1,000 shares outstanding and declares a $5,000 dividend, then stockholders will get $5 for each share they own. Capital appreciation is the increase in the share price itself. If you sell a share to someone for $10, and the stock is later worth $11, the shareholder has made $1.

Is It Risky to Own Stock?

All investments have a degree of risk. Stocks, bonds, mutual funds, and exchange-traded funds can lose value if market conditions decline. When you invest, you make choices about what to do with your financial assets. Your investment value might rise or fall because of market conditions or corporate decisions, such as whether to expand into a new area of business or merge with another company. Historically, stocks have outperformed most other investments over the long run.

A stock represents fractional ownership of equity in an organization. It is different from a bond, which operates like a loan made by creditors to the company in return for periodic payments. A company issues stock to raise capital from investors for new projects or to expand its business operations. The type of stock , common or preferred, held by a shareholder determines the rights and benefits of ownership.

New York University Stern School of Business. " Historical Returns on Stocks, Bonds and Bills: 1928-2021 ."

U.S. Securities and Exchange Commission. “ Stocks .”

American Bar Association. “ Does 'We the People' Include Corporations? ”

University of Pennsylvania Carey Law School. “ Independent Directors and Controlling Shareholders ."

European Central Bank. “ Keynote Speech by Marc Bayle de Jessé, Director General Market Infrastructure and Payments, ECB, at the Central Bank Payments Conference, Amsterdam, 27 June 2017 .”

Small Business Chron. " How Does a Shareholder Make Money? "

FINRA. " The Reality of Investment Risk ."

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Home » Kids

Stock Market Explained for Kids

Understanding the stock market can be…confusing. We’re here to help!

Have you ever heard a news report about someone named Dow Jones? Also, what is a NASDAQ, and is it contagious?

If you’re one of many who think that the stock market is a place you go and pick up stocks, you’re in luck! Today you’ll learn some stock market basics that will help you build a solid financial foundation for your future. But first, you need a better understanding of what the stock market’s all about and how it can help you build wealth.

Understanding the Basics First

Investing in the stock market is just one way you can grow your wealth. And you don’t have to wait until you’re an adult. Even as a kid, you can open a custodial investment account with your parents and start growing your money from an early age.

A stock market isn’t like a grocery store, where you can simply walk in, put items in a shopping cart, and check out at the register. Instead, you can think of it as a place where people buy and sell on our behalf.

Of course, not just anyone can trade on your behalf. The people who do this are called traders. They’re registered with the Securities and Exchange Commission (SEC), which is the agency that regulates the stock market.

Stock Market FAQs

It’s true; the stock market can get pretty technical. But we’re not trying to put you to sleep or overwhelm you here. To keep it simple, we’ve rounded up some of the most frequently asked questions on the subject. These will help you better understand the stock market and how it works.

What’s a stock?

Stocks are tiny pieces of ownership in a company. That means that you and whoever else has bought stock are co-owners (stockholders) of that company! Amazing, right?

What is a stock market?

A stock market is where those stocks are bought and sold – aka traded. Why “traded”? Because what’s happening is that someone who no longer wants their stock is trading it for money. And someone who wants it is offering money for it. Kinda like an auction.

How many stock markets (aka exchanges) are there in the US?

The major stock exchanges in the US are:

• NASDAQ (National Association of Securities Dealers Automated Quotations)
• NYSE (New York Stock Exchange)
• AMEX ( American Stock Exchange)

What can be bought and sold on the stock market?

• Mutual Funds
• Exchange Traded Funds (ETFs)
• Derivatives (These are fancy financial contracts that get their value from another asset, group of assets, or a benchmark.)

What’s a stock index?

It’s a snapshot that tracks the stock market as a whole instead of individual stocks. It gives you a general idea of how the market is doing. You know that graph shown on TV when the news reporter says, “The market is down” or “The market is up?” That’s the one!

There are a few different stock indices:

• Dow Jones Industrial Average (DOW)
• S&P 500 (Standard and Poor’s 500)

Can I buy/sell/hold stock if I’m under 18?

If you want to start investing in stocks, you’ll need your own brokerage account. Since those can only be opened by people over the age of 18 , you’d need to set up a custodial account with your parents. 

This is sort of a joint account that your parents control for you until you become an adult. It’s important to point out that if you don’t have any experience trading in the market and your parents are not finance experts either; you’re better off opening your account through a financial planner who can guide your investment decisions.

By purchasing stock, you are part of a community of stockholders for that company that can reap the benefits of the company’s growth. The more popular or in demand a company is, the higher its stock price becomes.

But, by the same token, companies sometimes lose money or don’t do as well as expected. In those cases, the business’s value goes down, which reflects in the value of your stocks. 

Rule of thumb: Risk goes both ways. You can lose just as much as you can earn. If you can’t afford to lose it, don’t invest it.

Compound Interest

With stocks and other investments, the longer you’re in the market, the greater chance you have of your stocks earning an amazing little thing called compound interest.

This means that when you make an investment, that investment earns a profit/interest, and every year, your interest earns interest. The more years you’re in the game, the better.

For example: If you invest $100 and just let it sit there, without adding anything else…

With the average return of 10%:

• At the end of Year 1, you’ll have a total of $110!
• At the end of Year 2, you’ll have $121
• At the end of Year 3, you’ll have $133.10
• At the end of Year 4, $146.41
• At the end of Year 5, $161.05

Now, imagine the potential if you invest monthly?!

Check out this Compound Interest Calculator from the SEC to get a better idea of what you’ll need to invest to reach your long-term financial goals.

Fun Activities to Help You Learn More

There are lots of ways to learn about the stock market. Here are just a few to get you started.

Stock Market Books For Kids

You know we love reading! If you’re a bit of a book worm yourself, check out these books that can help you learn more about the stock market. Head to our entire library of investing books for kids for more recommendations!

In Investing for Kids: How to Save, Invest and Grow Money , you can get a better sense of what investing’s all about and how to get started. It’s a great choice for kids who’ve outgrown their piggy bank!

Of course, it takes time to save enough money to open your investment account. That’s why How to Turn $100 into $1,000,000: Earn! Save! Invest! is a great guide for kids to do just that: earn money, set it aside, and then put it to work for you.

Stock Market Online Games for Kids

If games are more your vibe, check out The Stock Market Game . This fun simulation allows you to practice being in the stock market without any real risk. It even gives you an imaginary $100,000 to invest virtually.

Can’t get enough of online games? Check out the, Build Your Stax for more simulation goodness! You can play it solo or create a group for hours of entertainment with your friends.

If you’re looking for a fun new activity for game night, give Big Money a try. It’s an entertaining board game for kids 8+ that’s easy to play and exciting for all. With its short rounds that last around 40 minutes, you’ll find yourself playing this game over and over again.

If you want to become a trading master one day, Bulls and Bears is a great place to start. You’ll learn about the different types of assets, investment strategies, and build your financial IQ. This one’s for kids 12+ and parents who want a fun way to develop their money skills.

Are You Ready To Take On the Stock Market?

You should be feeling pretty good by now. You definitely know that the Dow Jones isn’t a person and that you can’t just walk into a stock market. You can feel confident that you know the basics and are ready to make some stock market moves – whether that’s virtually through online gaming or IRL with the help of a financial advisor.

Ultimately, the goal of the stock market is to buy a stock, hold it for a while, and then sell it for more than you paid for it. If you do this a few times over, through the years, you could set yourself up for a comfortable future.

Check out our Investing for Kids section for more advice on the basics of investing!