First of all, I just realized that my postcount passed 1000.
OK, the stock market: A basic problem for developing economies in the middle ages and Renaissance times in Europe was, how to raise enough money to pay for further development? In other words, how can we sustain growth indefinitely? The Age of exploration, discovery and European imperialism that was launched in the 15th century brought an urgency to this question, as well as the advances in military science that led to standing armies and massive navies. Warfare has always been expensive but in late Renaissance warfare the armies started growing and the governments needed huge navies to guard their trade routes and new overseas possessions. It used to be in medieval warfare that in times of need you'd conscript or buy (mercenaries) armies and build navies (all paid through simple tax levies) but as soon as the war ended they'd be disbanded or left to rot. Now the Europeans needed armies and navies 24/7 - and it was literally bankrupting monarchs across the Continent.
The Dutch were the first to find a solution to this problem, in the 17th century. They invented the
public company. The problem they solved was that a company made money through its operations - making and selling a product - but the company
itself and its assets had a value that was just sitting there, unreachable and unused. What they did was break ownership of the company into a thousand (+) pieces and sold each of those pieces individually on a public market. The pieces were called
shares, (or later,
stocks). The stock market, because it's a market where people trade
ownership of companies, is called the
Equities market. ("Equity" = "ownership".) The amount of shares that a company issued (i.e., "sold") began to grow so that modern companies issue millions of shares.
How much of an ownereship you own when you buy a stock is based on percentages - if they issued 1000 shares and you bought 1 stock, then you own 1/1000th of the company. Obviously, people buy many more than 1 stock... To have a
controlling interest in a company, you need to own at least 51% of its stock. There's a shady practice (illegal in some places) whereby companies issue x amount of stock and let
investors (people who buy their stock) build up percentages in ownership of the company, only to issue more stock later - diluting the value of the original stock, because it skewered all the percentages.
Public companies, like private companies (i.e., companies that are fully owned by a single person or group), must answer to their owners so they hold annual shareholders' meetings where they discuss the company's performance so far and what the plans are for the next year. Shareholders must approve every major decision made about anything the company does, including appointing company officers. Public companies
can pay out money to stockholders in profitable years as a form of profit-sharing (called
dividends) but they are not obligated to do so.
Off-track a bit, another way a company can raise cash is by borrowing money. They can simply go to a bank and ask for a loan, but the amounts of money they need is usually far more than the average bank can supply so what they usually do is borrow money from investors buy selling them debt securities - called
bonds. Bonds behave like credit cards; the company borrows the money investors give it by buying their bonds, and must pay it back on a regular schedule, and with a % interest rate. So, once again: When you buy a company's stock, you're buying a small piece of ownership of the company, when you buy their bonds you're buying a piece of their debt - i.e., you're lending them money, for a %. I work in the bond world, although my company was just acquired a month ago by a stock company. Only companies can issue stock, but many kinds of entities can issue bonds - companies, governments (national and local), as well as assets by themselves; that gets a bit complicated and I won't drag you there.
Now, just like everything you own you have the right to sell stocks, so the moment the first stocks were sold they had to open a stock market. It's very complicated though for a simple reason: since what you own is a piece of a company when you buy a stock, then
the value of the company will determine the value of your stock (how much it's worth) - and company values change constantly. There are armies of stock research analysts whose job it is to try to figure out the value of companies, or industries. Stock analysts are usually organized by industry - financial sector, energy, public utilities, technologies, etc. - which they specialize in studying. (I'm a bond analyst; we do things a little differently.) A company's single value is how much $$$ it will make for its owners, both now and in the future. Millions of different factors go into determining this. As you can see from the likes of Enron, Worldcom, etc., they are accounting tricks that can hide problems the company may be having (artificially making the company's value seem higher than it really is, tricking investors into buying the stock), though each time someone like this is caught new laws come out banning whatever they did. Anyway, valuation is the main point of the stock market. Maybe a company is making huge amounts of money now but analysts think the technology will be out of date in 10 years, so they lower the stock's ratings. Or, the opposite - for instance, Amazon.com (the online bookstore) wasn't making any profit at all for years but analysts still believed that someday it would, so they gave it higher ratings. There isn't a standard, but the general way analysts rate stocks is by declaring a stock either a "Buy" (i.e., a good stock to buy because you'll make money off of it if you do so), a "Neutral" (doing OK for the moment but the future isn't clear yet) or a "Sell" (If you buy this stock or you already own it you will lose money so get it out of your portfolio ASAP!). Like I said, millions of things can affect a stock's price. For instance, the possibility of a war in Iraq is negatively affecting worldwide stock prices because a war would affect the avaibility of oil for at least a short period driving oil and gas prices up everywhere. Well, that cookie you just ate, that computer game you're playing, the computer itself, cars, clothes, etc. etc. etc. like all products need to be transported from where they're made to where they're sold - and because the rpice of oil will likely be higher that means all companies will likely have to pay more to transport their goods, which means less profit. That means stock value goes down.
A
market bubble happens when a particular industry or
sector is artificially highly priced. The classic current example is the Technologies stock sector. Basically, people became rapidly aware in the 1990s of the internet and they fell in love with it - without ever really fully understanding what it could do or how it could be used. We're still only beginning to understand how it can aid communications now, and even things like energy transfers. Anyway, people just assumed that the internet was a golden goose and anything connected to it would automatically make lots of $$$, so they bought, bought, bought - driving stock prices through the roof. Well, whenever you have an artificial valuation, sooner or later reality will show up and ruin the party. The bubble bursts. After years of technology companies having sky-high stock prices but with almost none of them
making any profit, it all began to collapse in 1999. People suddenly remembered that the point of a company is to make money, and far too many of these technology firms weren't. A backlash ensued where everyone avoided any firm's stock even remotely connected to the internet or technology - even those firms that were actually making a profit - and it took several years, until just about now actually, for those firms with good sound business models who were turning a profit to be accurately valued again. Investors are cautiously moving back into technology stocks again, but this time remembering that they are businesses like any other - meaning they need to fit certain criteria before they can realize value in their stocks.
Analysts touched off a scandal recently when it turned out in NYC first that investment bankers (the people who actually organize new stock or bond issues for companies) were influencing the research analysts at their own firm to help sales. In other words, the investment bankers were hired by a company to create more stocks (called an "IPO") and the investment bankers leaned on their own analysts to say that these new stocks were hot stuff - even though the analysts in private e-mails said the stocks stink. This is a common practice unfortunately world-wide, but the U.S. is currently cracking down on it, which is good news for investors.
The ability to take money (or something that has value that can be converted into money), invest it into something else, and get back not only what you invested
but more is the basic point behind
capitalism. The initial investment (i.e., "capital") makes money for you. Capitalism owes its first baby steps to the stock market, and ever since those first primitive days humans have figured out extremely complex ways to squeeze financial value out of things and places you would never imagine possible. Yes, with these extremely intricate ways of making money there is plenty of opportunity for corruption but keep in mind that most people in the markets are honest and playing by the rules. Every country has regulatory bodies that strictly control what goes on, and while they can never be 100% they keep the market place level and pretty much guarantee that the only way to lose money in the markets is through bad investments, and not through crooked players.
So what's this all mean for you, the average person who might be considering investing in stocks? Because of the above-mentioned market bubble and the analyst scandals, many common people have soured on the stock market but that's because they had unrealistic expectations in the 1990s. Yes, stocks do go up and you can make lots of money in them, but they also go down too (meaning you can lose money too). There is only one thing to consider when you want to buy stocks: yourself. What are your financial goals? Make $1 million in 5 years? Buy a house in 10 years? Pay for your kids' university in 20 years? Your retirement in 40 years? All of these goals require very different investing strategies. One thing financial advisors emphasize is the long-term goals, because in the interim stocks go up and down. In other words, although you may lose money now because the stock market's in the toilet, over a 20 year period you may still make money. It's keeping your eye on the ball. Everyone's situation is different (where they are in life, what their goals are, etc.) so you need to sit down with a professional advisor and sort out the best way to meet your goals.
Does that answer your questions, Skullbones? Hit me with any more! BTW, the investment markets are broken into two categories, institutional and retail. Institutional markets are for corporations and governments, retail markets are for individual people. I work in the institutional markets, meaning I deal with banks, insurance companies, asset managers, trusts, governments, etc.
With your per post word count, that must be a trilogy by now.
