What is the stock market?

Question

I have never really understood what the stock market is. I have seen on the news that stocks have gone down. What does that mean? How does a stock hold its value? What is NASDAQ? Why is the stock market so important? What is a stock? What is going to happen now that stocks went down?

Answer 1

Try this web site for starters.

http://en.wikipedia.org/wiki/Stock_market

Answer 2

A stock is a partial ownership interest in a corporation. There is usually a slightly different name for ownership of partnerships and other business forms such as business trusts. They are usually called units, but it is the same thing in practice.

The stock market is a place, sometimes now an electronic place, where individuals and firms go to buy and sell these ownership interests in exchange for money. In the case of the stock exchanges, the individual shares are auctioned off continuously. So buyers compete to be the high bidder to buy at the same time sellers are competing to be the low bidder to sell. When the two prices meet, they trade cash for shares. The NASDAQ works more like a store. Different market makers (stores that sell stocks--just like Walmart but the inventory is stocks) publish the prices they will pay or accept to buy or sell stocks. They compete for the best price with one another. You select the best price at any given moment and the stock is yours, or the cash if you are selling.

Stocks do not actually go up or down, rather the auction price for them goes up or down. When the market goes up, it means that on average, prices at the auction were higher today than yesterday's prices; likewise when the market goes down, it meanst that on average, prices at the auction were lower than today.

The market is important for a number of reasons. First, it gives a public and neutral place where anyone can see the prices other people value investments at. You can then choose to participate or not participate depending on whether you feel the prices are too high for you. Second, it permits the original owners of a business to sell out their ownership interests to the public. They can then go out and form new businesses or do whatever they like. Venture capitalists depend up it. If there wasn't a market for stocks, business in America would gradually dry up.

Nothing in particular is likely to happen because prices, on average, fell today. It doesn't mean anything. It can, at times, have other indirect impacts, but there is no automatic reason for it to have an impact. For example, many firms fund their pensions with investments in the stock market. If it falls too much, they may have to buy additional stocks to make certain sufficient cash is on hand to cover their employees pension needs.

Stocks do not "hold value." They are paper representations of an ownership interest. If the company is expected to do well in the future, people will pay money for that future value. If their estimates are correct they will do well. If they are incorrect they can get badly hurt, or occasionally very happily surprised.

Answer 3

The stock market is a *****.