The Stock Market Essay

1028 words - 5 pages

The stock market is an essential part of a free-market economy, such as America’s. This is because it provides companies the capital they need in exchange for giving away small parts of ownership in their company to investors. The stock market works by letting different companies sell stocks to gain capital, meaning they sell shares of their company through an exchange system in order to make more money. Stocks represent a small amount of ownership in a company. The more stocks a person owns, the more ownership they have of that company. Stocks also represent shares in a company, which are equal parts in which the company’s capital is divided, entitling a shareholder to a portion of the company’s profits. Lastly, all of the buying and selling of stocks happens at an exchange. An exchange is a system or market in which stocks can be bought and sold within or between countries. All of these aspects together create the stock market.
The biggest stock exchanges are the New York Stock Exchange and NASDAQ. The New York Stock Exchange is a large building in Lower Manhattan that does auction-style trading with a lot of face to face interaction through specialists, brokers, and buyers. There are upper floors in this exchange on which specialists determine the prices of all the stocks. This information then travels to the brokers who work auctions face to face with buyers in order to sell the stocks. America’s biggest companies, like Coca-Cola and McDonald’s, sell their stocks through this exchange. NASDAQ is a virtual stock exchange with no physical building. This exchange was created during the 1970s but began thriving during the tech boom of the 1990s. The tech boom helped this exchange become the home of more technological companies like Dell and Microsoft. Although the New York Stock Exchange is physical and the NASDAQ is virtual, stocks of all kinds can be sold through both.
The DOW Jones indicates how well or poorly the stock market is performing. The DOW Jones does this by computing the average price of the top 30 stocks and dividing that number by a divisor to account for splits and merges. The Standard and Poor 500 is another stock market indicator that shows the risk and return of all large cap companies. The S&P 500 does this by tracking the market capitalization of the top 500 companies and using those reports to represent the stock market as a whole. Both of these indicators can help predict the performance of the market and certain stocks by analyzing the previous results and making an educated guess of where the stocks will go from there. The flaws of these indicators are that they can’t ever predict the stock market with complete accuracy. They also can’t predict very far into the future, which leaves the stock market somewhat reliant on chance rather than strategy. Another flaw in the system is that the indicators use price-weighted indexes rather than market value weighted indexes. This gives the higher priced stocks a heavier impact...

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