Today’s Wonder of the Day was inspired by Rogaciano from Otsego. Rogaciano Wonders, “How does the stock market work?” Thanks for WONDERing with us, Rogaciano!
Have you ever been shopping with your family? People visit many types of markets to shop. You may have been to the grocery store or a farmers' market to buy food. Maybe you've gone to the mall for clothing. Some people visit supermarkets to buy many items in one place.
All of these markets are places where people buy and sell things. You and your family are the buyers, and the owners of the market are the sellers. There's another type of market you may not have heard of. It's called a stock market!
At a stock market, people buy and sell pieces of companies, which are called stocks. The businesses on a stock market are publicly traded. That means anyone who wants to own part of the company can buy stocks. How would you like to have a say in the next Disney movie? How about the next drink sold by Starbucks? When people own stocks in a company, they have a vote in company decisions.
Many people don't realize there are multiple stock markets! The most popular stock markets in the United States are the New York Stock Exchange and the Nasdaq. However, there are fourteen smaller stock markets that also allow people to buy and sell stocks.
That may surprise you if you've ever heard someone say, "The stock market is looking up!" That phrase seems to mean that there is only one stock market. However, when a person talks about how "the stock market" is doing, they mean all the stock markets overall. Indexes measure stock market performance. You can look up an index, like the Dow Jones, online. If stock prices are rising, that means the stock market is strong. If stock prices are dropping, the stock market is not doing well.
Have you ever heard of someone who made a lot of money on the stock markets? Many people buy stocks hoping to make money. However, making a profit on stock markets is hard! To make a profit, investors need to sell stocks at a higher price than they paid for them. That's tough to do because it's often impossible to tell when stock prices will rise and fall.
Think of it like this: Imagine you bought a basketball signed by LeBron James for $100. If someone offered you $110 for it tomorrow, you could sell it and make a $10 profit. You could also hold onto the basketball and sell it in a few years. Maybe LeBron's career continues going well and, in a few years, the value of the ball is $200. Waiting to sell was a great idea -- you made $100! On the other hand, what if the basketball goes down in value? What if someone will only pay $75 for the signed ball in a few years? In that case, waiting to sell caused you to lose money. There's no way to know exactly what will happen to the value of the ball. This is the risk investors take when they buy and sell stocks.
Most people who want to make money on the stock markets hire a person called a broker. Brokers make predictions about the best times to buy and sell stocks to make a profit. Can brokers tell the future? Of course not! Instead, brokers pay close attention to the stock markets and become experts on when prices will rise and fall.
Stock prices are set when buyers and sellers agree on a price. That means official stock prices are a reflection of how much investors think a company is worth. This can be influenced by things like the media, natural disasters, politics, and social issues. For instance, a company that has been on the news for selling broken products would see a drop in its stock price. On the other hand, a business that has just been endorsed by a popular celebrity or political figure could see its stock price rise.
Are you ready to make a fortune on the stock markets? Before you get started, remember that investing in stocks is a big risk. Many people end up losing money when the value of their stocks goes down. Events called stock market crashes are when the prices of all stocks sharply drop at once. When the stock markets crash, investors and businesses lose a lot of money. Stock market crashes even cause big economic disasters like the Great Depression.
Do you think you could predict rises and falls in the stock markets? Would you love to own a piece of your favorite company? You might start making money goals today, but learn everything you can before you invest!