The Ups and Downs of the Stock Market
Everyone is talking about the stock market. The stock market “goes up” and people are happy. The stock market “goes down” and people are sad. Just what is the stock market, and why does it go up and down so much?
The stock market is a place where you can buy a tiny piece of a big business. Many of these big businesses have names you know, like McDonald’s, Disney, or WalMart. They have divided themselves up into millions of little pieces. Anyone, including you and me, can buy some of the pieces, 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-raking business but you don’t have
the money to buy a rake and some big leaf bags to get started.
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| The floor of the New York Stock Exchange is a busy place, with millions of shares being bought and sold every day. |
One way to raise the money would be to divide your leaf-raking business into little pieces and then sell some of those pieces to other people. Let’s say you will need $24 to buy the rake and bags. You could divide your business into ten pieces, keep two for yourself, and sell the remaining eight pieces for $3 each. In this way, you would be able to raise the money you needed. In return, investors, the people who bought the pieces of your business, would be able to 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 and the investors might lose money, too!
When a big business does this, it divides itself up into millions of shares of stock. It sells those shares to thousands of people and raises billions of dollars. After it divides itself up and sells off the shares, people keep buying and selling the shares among themselves. Over time, people change their minds about whether they want to buy those shares of stock, so the price of the shares goes up and down.
By Low, Sell High
If
a business is successful,
lots of people will want to buy its stock and the price
will go up. For instance, at the end of 1996, the price
of one share of stock in WalMart was about $23. By the end
of 2000, the price had gone up to more than $53. So if you
bought one share of stock at the end of 1996 for $23 and
then sold it at the end of 2000 for $53, you would be $30
richer. That’s
why people are happy when stock prices go up. They can make
money.
Of course the opposite can happen. A company called Fruit of the Loom had this problem. In the early 1990s, Fruit of the Loom was the leading maker of children’s underwear. At the beginning of 1993, its stock price was around $50. But the company started to have problems, and by the end of 2000, its stock price was less than $1. So if you bought a share of Fruit of the Loom stock at the beginning of 1993 for $50 and then sold it at the end of 2000 for $1, you would have lost $49, almost all of the money you invested.
That’s why people are sad when stock prices go down. They can lose money.
Hope for a “Bull” Market
When the prices of many stocks go up, it’s
called a bull market. When the prices of lots of
stocks go down, it’s
called a bear market. No one is really sure where
these names come from, but they have been around since the
1800s. Some people think they are based on how real bulls
and bears behave. When a bull catches you, it tosses you
up with its horns. When a bear catches you, it pulls you
down with its paws.
Because you can lose money buying stock, it is very important to learn everything you can about a business before investing in its stock. All businesses, no matter how good they are, have their ups and downs. But if you learn all you can about a business before buying its stock, and are prepared to hold on to the stock for many years, you will probably be able to sell it for more than you paid for it.
More than seventy million Americans own stock. It is very likely that your parents or some of your relatives own some. Who knows, someone in your family may own a piece of McDonald’s or Disney or WalMart. Find out. Then the next time you go to one of these places you can tell the people who work there that you know an owner.
