How the Stock Market Works and Why We Use It

Picture by Time Magazine

Most kids know that the economy is not at its highest point right now. Due to the COVID-19 pandemic, the global economy is struggling. This is evident in the stock market declines we have seen in 2020. The stock market is considered to be an indicator of how our economy is doing. If the stock market is doing poorly, the economy is generally doing poorly.

For example, the Dow Jones, which is a stock market tracker based on a point system that measures the stock performance of 30 select companies listed on U.S. stock exchanges, is at around 28,500 points, down from a high of nearly 30,000 earlier this year. The Dow Jones is an indicator of U.S. stock market performance, as well as overall economic performance. But what really is the stock market? 

The stock market is not an actual market. You don’t go there to buy groceries or a pair of jeans. It is not a physical place; most stocks trade electronically. It is an electronic system where investors can buy and sell stock of a public company. Almost every public company sells stocks. If the company is doing well, making money and growing, the company will report its earnings every few months and investors will then want to buy that company’s stock. The stock price of a company will go up and down depending on supply and demand. The higher the demand for the stock, the higher the stock price will be.

As Warren Buffet said, “The lower the stocks go, the more I buy.” This means that when the stock market prices are low, it makes sense to buy stock because then when you later sell the stock at a higher price, you can make a profit. Profit is the difference between the price you sold and the price you bought the stock. On the other hand, if you end up selling your stock at a lower price than what you paid for it, then you will have lost money, and that would be called a “loss” rather than “profit.”

When you own a stock in a company, you are investing in that company and you are basically one of the many “owners” of that company. You can buy one stock, three stocks, or even hundreds. For example, if a company has 1 million stocks for sale, and you own 100, then you own 0.0001 percent of the company and will be entitled to 0.0001 percent of the company’s market value.

In the United States, there are two national stock markets, or exchanges. They are the NASDAQ, National Association of Securities Dealers Automated Quotations, and the NYSE, the New York Stock Exchange. Companies use either one to exchange, sell, and buy stocks. For example, Apple uses NASDAQ, and Delta Airlines uses NYSE. Companies can list their stock on either exchange, but the main one is NASDAQ.

The stock market is complicated, and the way it fluctuates can sometimes be a bit of mystery.

Categories: Business

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