In the 1600s, the Dutch East India Company employed hundreds of ships to trade gold, spices, silk and porcelain all over the world. This massive operation required more funding, which is where private citizens began acting as investors. They exchanged their money for a share of the ship's profits. Such shares were sold at shipping ports and coffee shops. This proved massively profitable for everyone involved and began to expand. Unknowingly, the Dutch East India company built the first stock market.
This simple supply-demand equation evolved into the complicated modern day stock market. There are two seasons of the stock market- the bull market and the bear market. A bull market is a market that is on the rise and where the economy is sound; while a bear market exists in an economy that is receding, where most stocks are declining in value.There has been a bull market in the US since the end of the 2008-09 financial crisis till the beginning of the pandemic in March 2020. The stock market is currently recovering.
The stock market is people buying and selling small pieces of companies based on how much they think it will be worth. When a private company first sells shares of stock to the public, this process is known as an initial public offering (IPO). In essence, an IPO means that a company's ownership is transitioning from private ownership to public ownership.IPOs are typically listed on an exchange. The US has two major exchanges- NYSE and the NASDAQ.
The New York Stock Exchange (NYSE) was founded in 1792 by 24 stockbrokers under a buttonwood tree in New York City. The National Association of Securities Dealers Automated Quotations (NASDAQ) is another exchange that was founded in 1971 and is completely electronic. Both of these exchanges are in the USA and apps like Robinhood trade on the NASDAQ exchange.
Indexes take a number of stock prices from these NYSE and NASDAQ exchanges and condense it into one clean number. The S&P (Standard and Poor's) 500 tracks 500 of the larger publicly traded companies across both exchanges in the US. The Dow Jones Index is much more exclusive and measures 30 of the largest companies across these two exchanges.
For the different types of investments, or to create a portfolio of stocks there are mutual funds, ETFs and index funds. Mutual funds are a professionally managed portfolio of investments that pools money together with other investors to purchase a collection of stocks and securities. An Exchange-Traded Fund (ETF) is traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold throughout the day on exchanges while mutual funds are bought and sold based on their price at day's end, at 4pm ET. An index fund is a portfolio of stocks designed to mimic the composition and performance of a financial market index such as the S&P 500.
There are six different asset classes -Government bonds, corporate bonds, small companies, large companies, real estate and emerging markets. Creating a portfolio requires diversification among all six asset classes. Emerging markets include developing countries like China, Russia and India.
Newer types of commission free investments are penny stocks and fractional shares.Penny stocks are classified as stocks that trade for less than $5 per share. The Wolf of wall street and Boiler room are possible examples of penny stock's volatility and schemes surrounding this method of investment. Fractional stocks are a portion of one full share of any price. Fractional shares offers the bargain of penny stocks without the volatility.
Human confidence in the market has the power to trigger everything from economic booms ato financial crises. For example, John Keynes, a renowned British Economist created an analogy of stock markets as beauty contests. In 'The General Theory,' Keynes described a newspaper contest that published the pictures of 100 people.Contestants were asked to choose the six women they thought had the most beautiful faces.A sophisticated and often successful strategy was to pick the faces that they believed everyone will find pretty, not just one's own opinions. Similarly, you win by picking the investment that you expect others will soon bid up higher. This unpredictable system is based on mass psychology and nothing else. This difficult to track variable is why professionals promote reliable long term investing over short term investments aiming to make some quick cash.
Gamestop served as a metaphorical win for a large number of small investors, but currently the top ten percent of the wealthiest Americans own 84 percent of Wall Street's portfolio's. As the market grew, fewer people have benefitted. The easiest way to close the wealth gap is to invest.