DLC Blog

The Stock Market

What exactly is the stock market? Quite literally, it is a market—a place for selling and exchanging goods and services—in which individuals trade, or deal, in stocks—which are shares, or individual “portions”, of a company. When you think of a market, you probably think of a physical place to buy and sell produce, dairy products, arts and crafts, and other similar items. For example, I love visiting the University District Farmer’s Market, near the UW, and purchasing inexpensive, locally-grown, all-natural fruits, pastries, and cheeses (I still cannot be convinced to purchase vegetables, though). Other examples include the Spokane Farmer’s Market and pretty much any grocery store imaginable.

Now imagine a place like a store or an outdoor market, but where they don’t sell flowers and salmon jerky. Imagine the market sells little pieces of paper, or nowadays, electronic receipts, that indicate partial ownership in a company. These portions of the company, which is said to be public if anyone can buy them, are called stock, and believe me they aren’t as tasty as portions of pie or other delicious foods. Main stock exchanges in the United States exist in New York and Chicago, with multiple smaller locations. Internationally, London, Hong Kong, and Milan, Italy have major stock markets, alongside dozens of smaller markets.

A Chicago exchange, before the days of internet communication.

By purchasing stock, you become a shareholder or a stockholder in a corporation. In the United States and many other countries, under the principal of limited liability, the most you can lose when you invest in stocks is the amount you originally put in. That means if you buy $1 million worth of stock in a company worth $10 million (in other words you have a 10% equity, or ownership, in the company), the most you could lose would be that $1 million you originally invested.

For example, say you put all your money into BeeFresh Honey Inc., a company that makes honey and honey products and distributes them to stores statewide. Let’s say business is booming because a new study came out that said honey helps to reduce cancer, and 4 out of 5 doctors recommend eating a jar of honey a day. Everyone’s buying the honey, and the value of the company is going up and up—meaning your stake is more and more valuable every day. Now, let’s say that a farmer who helped to start the company made up that study—it’s a big hoax! She just wanted to earn extra money from selling honey. The news gets out, people realize that they are gaining weight, feeling tired, and getting tons of cavities from all that honey they’ve been eating. Everyone goes back to eating only a little honey, like they did before the study, but what’s worse is that everyone boycotts your company for making up the hoax! So BeeFresh Honey Inc. goes bankrupt and you lose all the money you put in. Luckily for you, if a group of affected consumers files a group (or “class-action”) lawsuit against the company, saying even after going bankrupt it should pay out millions of dollars to help treat people’s cavities, you won’t ever have to pay anything whether they win or lose. You would probably feel bad for helping to make a company with such bad morals, but your punishment was enough when you lost all your money. The law is not clear-cut for the founders, board of directors, etc.—the people who are the heads of the company—but usually they will not be held liable either unless they acted in extreme criminal activity.

Anyhow, there is money to be made, and just as much money to be lost, in the stock market. Buyer beware! Once you turn 18, if you decide to purchase stocks, making informed decisions about the companies in which you invest is crucial to being an ethical and successful citizen. Since the stock market is such a crucial part of the world economy, I encourage you all to stay informed and read up on the issue.

DLC Library search on "stock market"
The official website of the New York Stock Exchange
A link for younger kids about the stock market, but it can still be fun and informative! (maybe used to teach younger siblings...)

Posted by Josh at November 30, 2006 02:26 PM in Social Studies.