Everyone is talking about the stock market. The stockmarket “goes up” and people are happy. The stock market“goes down” and people are sad. Just what is the stockmarket, and why does it go up and down so much?
The stock market is a place where you can buy a tiny pieceof a big business. Many of these big businesses have namesyou know, like McDonald’s, Disney, or Wal-Mart. Theyhave divided themselves up into millions of little pieces.Anyone, including you and me, can buy some of thepieces, called shares of stock.
“Share” in the Profits
Why would a business want to divide itself up and sell the pieces?Because it needs money. Let’s say you want to start a leaf-rakingbusiness but you don’t have the money to buy a rake and some big leafbags to get started.
One way to raise the money would be to divide your leaf-raking businessinto little pieces and then sell some of those pieces to other people. Let’ssay you will need $24 to buy the rake and bags. You could divide yourbusiness into ten pieces, keep two for yourself, and sell the remainingeight pieces for $3 each. In this way, you would be able to raise themoney you needed.
In return, investors, the people who bought the pieces of your business, would be ableto sell their shares for a higher price than they paid for it if your business is a success.Of course, if your business is a failure, fewer people will want to buy the shares andthe investors might lose money, too!
When a big business does this, it divides itself up into millions of shares of stock. Itsells those shares to thousands of people and raises billions of dollars. After it dividesitself up and sells off the shares, people keep buying and selling the shares amongthemselves. Over time, people change their minds about whether they want to buythose shares of stock, so the price of the shares goes up and down
Buy Low, Sell High
If a business is successful, lots of people willwant to buy its stock and the price will go up.For instance, at the end of 1996, the price ofone share of stock in Wal-Mart was about$23. By the end of 2000, the price had goneup to more than $53. So if you bought oneshare of stock at the end of 1996 for $23 andthen sold it at the end of 2000 for $53, youwould be $30 richer.
That’s why people are happy when stockprices go up. They can make money.
Of course the opposite can happen. A company called Fruit of the Loomhad this problem. In the early 1990s, Fruit of the Loom was the leadingmaker of children’s underwear. At the beginning of 1993, its stock pricewas around $50. But the company started to have problems, and by theend of 2000, its stock price was less than $1. So if you bought a share ofFruit of the Loom stock at the beginning of 1993 for $50 and then sold itat the end of 2000 for $1, you would have lost $49, almost all of themoney you invested.
That’s why people are sad when stock prices go down. They can losemoney.
Hope for a "Bull" Market
When the prices of many stocks go up, it’s called a bull market. Whenthe prices of lots of stocks go down, it’s called a bear market. No one isreally sure where these names come from, but they have been around since the 1800s. Some people think they arebased on how real bulls and bears behave. When a bull catches you, it tosses you up with its horns. When a bearcatches you, it pulls you down with its paws.
Hope for a "Bull" Market
When the prices of many stocks go up, it’s called a bull market. Whenthe prices of lots of stocks go down, it’s called a bear market. No one isreally sure where these names come from, but they have been around since the 1800s. Some people think they arebased on how real bulls and bears behave. When a bull catches you, it tosses you up with its horns. When a bearcatches you, it pulls you down with its paws.
