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How does the stock market work? - Oliver Elfenbaum

IntermediateAmerican accentAnimated lesson4 min

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Transcript: 34 sentences

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  1. 0:07 In the 1600s the Dutch East India Company employed hundreds of ships to trade gold, porcelain, spices, and silks around the globe.
  2. 0:16 But running this massive operation wasn’t cheap.
  3. 0:19 In order to fund their expensive voyages, the company turned to private citizens - individuals who could invest money to support the trip in exchange for a share of the ship’s profits.
  4. 0:31 This practice allowed the company to afford even grander voyages, increasing profits for both themselves and their savvy investors.
  5. 0:40 Selling these shares in coffee houses and shipping ports across the continent, the Dutch East India Company unknowingly invented the world’s first stock market.
  6. 0:50 Since then, companies have been collecting funds from willing investors to support all kinds of businesses.
  7. 0:57 And today, the stock market has schools, careers, and even whole television channels dedicated to understanding it.
  8. 1:04 But the modern stock market is significantly more complicated than its original incarnation.
  9. 1:10 So how do companies and investors use the market today?
  10. 1:14 Let’s imagine a new coffee company that decides to launch on the market.
  11. 1:19 First, the company will advertise itself to big investors.
  12. 1:22 If they think the company is a good idea, they get the first crack at investing, and then sponsor the company’s initial public offering, or IPO.
  13. 1:31 This launches the company onto the official public market, where any company or individual who believes the business could be profitable might buy a stock.
  14. 1:40 Buying stocks makes those investors partial owners in the business.
  15. 1:44 Their investment helps the company to grow, and as it becomes more successful, more buyers may see potential and start buying stocks.
  16. 1:52 As demand for those stocks increases, so does their price, increasing the cost for prospective buyers, and raising the value of the company's stocks people already own.
  17. 2:02 For the company, this increased interest helps fund new initiatives, and also boosts its overall market value by showing how many people are willing to invest in their idea.
  18. 2:13 However, if for some reason a company starts to seem less profitable the reverse can also happen.
  19. 2:19 If investors think their stock value is going to decline, they’ll sell their stocks with the hopes of making a profit before the company loses more value.
  20. 2:28 As stocks are sold and demand for the stock goes down, the stock price falls, and with it, the company’s market value.
  21. 2:35 This can leave investors with big losses - unless the company starts to look profitable again.
  22. 2:41 This see-saw of supply and demand is influenced by many factors.
  23. 2:45 Companies are under the unavoidable influence of market forces - such as the fluctuating price of materials, changes in production technology, and the shifting costs of labor.
  24. 2:56 Investors may be worried about changes in leadership, bad publicity, or larger factors like new laws and trade policies.
  25. 3:03 And of course, plenty of investors are simply ready to sell valuable stocks and pursue personal interests.
  26. 3:10 All these variables cause day-to-day noise in the market, which can make companies appear more or less successful.
  27. 3:16 And in the stock market, appearing to lose value often leads to losing investors, and in turn, losing actual value.
  28. 3:24 Human confidence in the market has the power to trigger everything from economic booms to financial crises.
  29. 3:30 And this difficult-to-track variable is why most professionals promote reliable long term investing over trying to make quick cash.
  30. 3:38 However, experts are constantly building tools in efforts to increase their chances of success in this highly unpredictable system.
  31. 3:46 But the stock market is not just for the rich and powerful.
  32. 3:49 With the dawn of the Internet, everyday investors can buy stocks in many of the exact same ways a large investor would.
  33. 3:56 And as more people educate themselves about this complex system they too can trade stocks, support the businesses they believe in, and pursue their financial goals.
  34. 4:05 The first step is getting invested.

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