Share Markets

Share Markets

Key Ideas

An auction has a lot in common with the stock market. Buying stocks means buying what someone else
already owns, the price is set by a kind of bidding, prices change by the moment and depend on demand.
The price for a stock is determined using an auction system. The price, unlike that of most consumer
purchases, changes by the minute depending on the value investors place on the stock. If the price of a pair of jeans is too high it is reduced (“goes on sale”) until it is bought. If still not purchased, the jeans are destroyed.

With stocks, the price continues to fall until someone buys.
Just as a rancher uses stock to grow a herd, or as a nursery owner uses stock to grow bushes and trees, a
corporation uses stock to grow itself.
The word “stock” is also used this way by cooks who use stock to make soup.
Corporations sell stock to raise money and grow the business. When a company sells stock for the first time it is called “going public.” Most major corporations are publicly owned. Companies offer shares of ownership called stock.
As of this writing, exceptions include Mars, J. Crew, Levi Strauss, Bordens, L.L. Bean, and Hallmark.
Companies also raise money by selling bonds. If you buy a $5,000 bond from a company it agrees to pay you back when the bond matures at some point in the future, in the meantime it pays you interest. Bonds are more like loans. They too are traded on stock exchanges. Bonds and stocks are often grouped together and calledsecurities. Bonds obligate a company to pay the money back. But when companies raise money by selling common stock they don’t pay the money back. That’s a BIG difference.
Instead of promising your money back, companies give a share of ownership. If you own stock in McDonald’s
or Coca-Cola, you own a share of the company. If there are a million shares and you own 1000, you own.001 of the company.
As owners, the holders of common stock are entitled to elect the directors of the corporation and vote on major issues. These votes typically take place at the corporation’s annual meeting, which shareholders are invited to attend. Most share owners vote by proxy, meaning that they authorize someone else (usually management) to vote their shares.
Buying Individual Stocks vs. Mutual Funds
The program shows a young couple deciding how to invest for their future. They compare using a full service
broker, a mutual fund, or a discount broker. The point here is not to identify which method is best. It is to
teach that investment decisions should be made with careful thought and research. There is no single correct
answer.Why do share prices go up or down? The number of shares is limited. So if a stock has more buyers than sellers, its price is bid up. But if the opposite is true – big supply and very little demand – the price drops. It’s a classic example of the law of supply and demand.

When you buy a stock, you buy an opinion about the future of the company.
Here’s that idea again — the price of a stock reflects the opinion of investors. Whether their opinion is correct or wrong has no bearing on the current price of the stock.
Picking stocks is a bit like a beauty contest in which you win if you can determine which contestant the judges will crown as the winner. It doesn’t matter who you think is most beautiful. What counts is if you can “read the judges mind.” That’s how you win with stocks. By picking stocks lots of people will want to buy in the future.Economist John Maynard Keyes was particularly fond of this metaphor. The long running TVgame show,“Family Feud” is another example of this win-by-picking-what-others-will-select situation.
The second way shareholders earn money is through dividends. For example, your $10 stock pays a twenty
cent dividend four times a year, each year you own it. A dividend is a share of the profits paid to current
shareholders.

Some companies pay regular dividends year after year. These stocks are best for investors who need regular
income... But other companies rarely pay dividends. Companies like Microsoft, Intel, Amazon plow profits
entirely into expanding the business; and that can be good for investors as well. Companies are not required
to pay dividends. Stocks are not short term investments, but they do quite well over the long term. Since 1925stocks have gained on average 9% a year.
If you could have invested $15 a week in a typical basket of stocks at almost any time in the past century
starting at age 15, you would be a millionaire by age 55. This assumes a 9% return.