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trading in the United States can be traced back to over
200 years ago. At that time, the American
Revolution had started and our Colonial government
needed cash to pay for the war with Great Britain. It was decided that one way to get money would
be to sell war bonds. Bonds are pieces of paper
stating that at a later date it could be cashed in for a
profit (amount above what is paid for the bond). While this did
much to supply the Colonial army with uniforms, food, and ammunition, companies caught
on to this quick way of raising money. Before this time, their only other way of getting a
large sum of money was to borrow it from a bank. Borrowing money is costly
and hard for small companies that need to expand quickly. Companies that
could get money from the sale of stocks took the money and
invested it to hire new employees, build more stores, or make better products.
Investors who risked their
money to buy (stock) shares of a company
found it a great investment. For example, as companies prospered their stock share
prices went up. This made sense to small
investors since Stocks are
relatively inexpensive compared to starting their own company or
purchasing other investments like gold or real-estate.
all
Street at the time was becoming this country's center for finance. In
1792, twenty-four merchants signed an
agreement that started the New York Stock Exchange
(NYSE) and with that they agreed to meet everyday under a buttonwood tree on
Wall Street to trade stocks and bonds. This later became known
securities trading.
Stocks are considered a collection of shares (like pie slices) in a company; hence this
is where the name stock shares came from. A stock is a certificate (piece of
paper) stating you own a small fraction of that
company (corporation). A corporation is a
company that divides its self into individual share to allow for multiple
owners. Owning a small portion of a company means when the company does
well your stock will increase in price.
However when a company does poorly, the stock price will normally
decrease in price.
Companies issues
stocks so they can raise money to help their
company grow without taking out a costly loan that has to be paid back. A company might use
their stock sale money to
hire new employees, build a new building,
or conduct research for
new products and
services. Stocks are represented with a symbol. For
example, Nike's stock symbol is NKE and Wal-Mart's is WMT. The reason for
symbols is to make trading more
accurate and convenient when one wants to purchase a particular company.
he
New York Stock Exchange (NYSE) is not the only stock exchange in
this country. Even though the NYSE is the biggest and best know stock
exchange, there are many more. There are
stock exchanges in Chicago, Los Angeles,
San Francisco, Boston, Philadelphia, and Cincinnati. Stocks are only
traded at exchanges to ensure the safe and secure trade of stocks.
Fraud often threatens the security and life of an organization and due to
the importance of stock trading to the US and world economy, every effort is
made to ensure the accuracy of a trade. Approximately 2,500 of the
largest companies are traded on NYSE
however over 5,000 companies are traded on an exchange called the
National Association of Securities Dealers Automated
Quotations (NASDAQ).
NASDAQ
is a computer automated trading system unlike the NYSE which uses people to
help make the trades. With NASDAQ, a computer does most of the work for NASDAQ
trades.
ealthy
individuals were the first to catch on to trading stocks. However, what the
regular person came to realize was that stocks were a good investment over
time and much less expensive than owning land or a second house. Also, what
these investors knew was that their
money was being put to good use. The company shares they purchased today
would help a company grow
stronger and one day would be worth more than what
they paid. As stated before, a stock share is a small fraction of a company.
However when you
buy a stock share, you are actually helping to pay for a small percentage or
part
of everything that the company owns like buildings, chairs, computers, etc.
All together when a company "goes public" and sales shares in their company
they can reap billions of cash to reinvest in their company.
Extra money a company gets from a stock sell helps them grow, do research,
and/or promote their company.
ike
any good business person, you hope to buy
at a low price for a stock and then
later sell that same stock for a
higher price, and thus profit from your
investments. So how are the prices of stocks determined? The price is
determined by what someone will pay for the stock. For example, if the
company makes mistakes and/or bad decisions that get reported or are
reflected in their financial report, the stock is like to fall in price
since many people who find this information out will then sell the stock.
As lots of people try to sell, the price continues to drop since there is a
large supply to sell but few buyers who want the s tock.
The price just continues to drop until
others take the risk and buy what you do not want. This is how the
price is determined. Basically stock prices drop when there is a large
supply of sellers and a low
demand of buyers. The opposite is true
however when there is a huge demand for a stock but few sellers who want to
sell the stock. Many people purchased Google at $85.00 years ago and
even though it is selling for much higher now, it is seen as a very good
stock and there are few who want to sell it. This low
supply of sellers and a
high demand causes the stock price to rise.
EBay works this way. Lots of bids cause the
price to rise. Little interest can cause the price to
drop.
he
selling of stock is done by a stock broker.
These are the people who are authorized to send request to the stock market to buy and sell on your
(shareholder's) behalf. For their services they are paid a
commission. When the stock market as a whole is
rising in value then it is referred to as a Bull Market.
But when the market as a whole is losing value and prices are falling the market
is said to be in a Bear Market. Historically the stock market
has show investors a positive return in almost all 10 – 20 years periods. It is
has proven for million of investors to be a wise
investment for a long term investment plan.
wo
indicators of how the stock market as a whole is doing are called the
DOW and the S & P 500. Both
of these indexes or samplings of the market help the average investor to see how
the markets are doing short term. The DOW is a listing of the
30 largest companies in their respective
industry. For example, Coca-Cola is listed on the Dow while Pepsi is not. Wal-Mart is
on the Dow while Target is not. So when you hear the DOW is down, the entire
market may not be doing bad but on average the top 30 company's stock are
falling in price. These 30 companies represent only a little over 1% of the entire
market. So to better gauge how the entire market is doing, there is the
S & P
500. This stands for the Standard and Poor 500 or the
top 500 companies listed on the NYSE. The
S & P 500 represents 20%
of the NYSE. This index includes both Coco-Cola and Pepsi. It would include
also both Wal-Mart and Target.
Now answer the questions below to see how well you
understood what you read.
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