Finance

Stock Market

Where ownership in companies trades — major financial institution

Stock market is where shares of companies are traded. Major exchanges: NYSE (New York Stock Exchange), NASDAQ, LSE (London), TSE (Tokyo). Companies issue stocks (IPOs) to raise capital; investors buy shares (ownership). Functions: capital allocation, liquidity, price discovery, wealth creation. Indices: S&P 500, Dow Jones, NASDAQ — track market movements. Volatile: subject to bubbles and crashes (1929, 1987, 2000, 2008, 2020). Long-term returns: ~7-10% annual including dividends, inflation-adjusted. Major source of: retirement savings, household wealth, capital for businesses.

  • Major exchangesNYSE, NASDAQ, LSE, TSE
  • FunctionsCapital allocation, liquidity, price discovery
  • IndicesS&P 500, Dow Jones, NASDAQ
  • Long-term return~7-10% annual (inflation-adjusted)
  • VolatilitySubject to bubbles and crashes
  • Total US market cap~$50 trillion

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Why stock market matters

  • Investment. Major asset class.
  • Retirement. 401(k)s, IRAs invest heavily.
  • Capital allocation. Companies raise funds.
  • Wealth measurement. Major wealth driver.
  • Economic indicator. Forward-looking.
  • Public policy. Regulation focus.
  • Education. Foundational finance.

Common misconceptions

  • Always rising. Crashes regular.
  • Predictable. Hard to time.
  • Just for rich. Index funds democratize.
  • Equals economy. Different concepts.
  • Can beat market easily. Most active managers don't.
  • High returns guaranteed. Significant risk.

Frequently asked questions

What's the stock market?

Marketplace for buying and selling stocks (shares of company ownership). Major exchanges. NYSE: largest by market cap. NASDAQ: technology-heavy. Plus: international (LSE London, TSE Tokyo, HKSE Hong Kong, etc.). Companies list to raise capital; investors buy/sell. Operates: through brokers, electronic systems. Modern: high-frequency trading, algorithmic trading.

What's an IPO?

Initial Public Offering. Company first listing on stock market. Sells new shares to public; raises capital. Underwritten by investment banks. Process. (1) Filing with SEC. (2) Roadshow with investors. (3) Pricing. (4) First trading day. Notable IPOs: Facebook 2012, Alibaba 2014, recent: many tech. Risky for investors: high volatility, often disappointing returns long-term.

What are stock market indices?

Composite measures of market performance. (1) S&P 500: 500 large US companies; market-cap-weighted; popular benchmark. (2) Dow Jones Industrial Average: 30 large US companies; price-weighted; older but less comprehensive. (3) NASDAQ Composite: ~3000 companies on NASDAQ; tech-heavy. (4) Russell 2000: small-cap. Various: international. Indices used to: track market, benchmark performance, basis for index funds.

What about long-term returns?

Historically. S&P 500: ~10% nominal annual return long-term, ~7% inflation-adjusted. Includes dividends. Significant year-to-year variation. Some years -50%; some +50%. Long-term: tends positive. Power of compounding: $10K invested in S&P 500 in 1980, with dividends reinvested, would be ~$1.5M today. Time in market vs market timing: time in wins.

What's the efficient market hypothesis?

Eugene Fama (1970, Nobel 2013). Stock prices reflect all available information. Implications. (1) Can't reliably beat market through analysis (semi-strong efficiency). (2) New info rapidly incorporated. (3) Past prices don't predict future. (4) Index funds make sense. Real markets: not perfectly efficient but strong tendency. Some inefficiencies exist (behavioral biases, slow info diffusion).

What's a stock crash?

Sudden major decline. Famous. (1) 1929: 90% peak-to-trough decline; Great Depression. (2) 1987 Black Monday: 22.6% one day. (3) 2000-2002: dot-com 49% decline. (4) 2008-09: financial crisis; 50% decline. (5) 2020 COVID: 34% in weeks; rapid recovery. Causes vary: bubbles, recessions, panics. Recovery: usually within years. Long-term investors: hold through crashes.

How does it relate to economy?

Connected but not identical. Stock market: forward-looking. Economy: current conditions. Often. Stock market falls before recession; rises during early recovery. But: many false signals. "Economists predicted 9 of last 5 recessions" (joke). Stock market: leading indicator (imperfect). Real economy: measured later. Mid-2020: stock market rose despite huge recession.