Stock Market

Animation: The Basics Of The Stock Market

Since its inception, the stock market has been one of the most powerful and consistent sources of wealth creation available.

Q1 hedge fund letters, conference, scoops etc

Although stocks see more volatility than other assets, they have also averaged a real return of 6.7% per year between 1925 and 2014, compared to just 2.7% for bonds and 0.5% for cash.

And over long periods of time, the extraordinary power of compounding can turn this differential into a wealth generation machine.

But What is a Stock Market?

There is no denying the stock market’s unparalleled ability to create wealth, but that doesn’t mean it’s always an easy sell to newcomers.

For most people, the very mention of the stock market conjures up images of a frantic floor at a busy stock exchange, people in suits yelling “Buy!” or “Sell!”, or even the sensational media coverage that can dominate the news cycle.

Today’s animation provides an easier reference point for potential newcomers – it comes to us from TED-Ed and it highlights the basics of the stock market, as well as how it works.

By understanding the original purpose of the stock market and also its history, we can better understand how the modern market applies to wealth creation.

In a nutshell, it provides a way for investors and companies to share the profit (and risks) of bold new endeavors, such as trying to invent a new cancer cure, discovering natural resource deposits, disrupting old business models, or innovating advanced technologies.

The stock market has allowed companies ranging from Amazon to Starbucks to succeed, and for investors to share in that success.

Basics of the Stock Market

Here are some other key questions that the animation helps to answer about the basics of the stock market:

How does a company get on the market?

A company needs to have an Initial Public Offering (IPO). This is traditionally done through big investment banks that help advise companies on the potential value of their company, and the market for their stock. More recently, companies like Slack and Spotify have IPO’d using a less traditional route.

How does going public help a company grow?

In the right scenario, listing on a stock market gives a company access to more capital. With more money, the company can make investments into new products and markets.

How is a stock price determined by the market?

By allowing millions of people to buy and sell shares of the company using the same set of information, it creates transparency and liquidity. Over time, this pushing and pulling creates a “fair” price for the stock.

What else influences stock prices?

Stock prices are not only influenced by what a company does – they are also influenced by external factors such as government regulations, market forces, competition, and changes in technology. Investor sentiment also plays a role.

Why invest for the long term?

Because short-term noise in the market can be hard to predict, most professionals promote long-term, reliable investment methods.

Some examples of this in practice would include low-cost index funds, mutual funds, or simply building your own diverse portfolio of stocks, bonds, and other investments for the long haul.

Past and Future

The stock market is very different today than it was when the first shares of the Dutch East India Company started trading in the 17th century.

Although the financial industry has increased in sophistication since those times, it still has the same general purpose – and it’s easier to get started investing than ever before.

Article by Visual Capitalist


Saved Articles
X
TextTExtLInkTextTExtLInk

The Life and Career of Charlie Munger

Charlie is more than just Warren Buffett’s friend and Berkshire Hathaway’s Vice Chairman – Buffett has actually credited him with redefining how he looks at investing. Now you can learn from Charlie firsthand via this incredible ebook and over a dozen other famous investor studies by signing up below:

  • Learn from the best and forever change your investing perspective
  • One incredible tidbit of knowledge after another in the page-turning masterpiece of a book
  • Discover the secrets to Charlie’s success and how to apply it to your investing
Never Miss A Story!
Subscribe to ValueWalk Newsletter. We respect your privacy.

Congrats! Are you a smart person?

We have an exclusive targeted & limited time offer for being a sophisticated and loyal reader.

ValueWalkPremium is a website and newsletter on the latest industry news much of which is not in the public domain and obtained via our sources.

We also have 10 years of resources on how to use this information to better your investment process.

Sign up for  today and get our exclusive content for 40% off. This is our second biggest discount ever!!

Use coupon code VIP20 or click on the button below

Limited time offer only ENDS 2/29/2019 or after next 25 subscribers take advantage whichever comes first – please do not share this discount with others

 

0