Did you know the stock market has been around for over 400 years? The first stock market was established in 1602 in Amsterdam, and the first American stock exchange was formed in Philadelphia in 1790. And being stock exchanges are such a large part of the American economy, I figured it was worth mentioning.
To understand stock exchanges, you, first, have to understand stocks. Stocks, or shares, are simply small piercing a company. When companies such as Walmart, or Home Depot, issue shares or stock, they are in a sense, are selling part of their business. They, in turn, take the money they raised from selling shares and use it to build their business. As their business grows, the company hopefully becomes more valuable. And as the company’s value grows, the value of each share increases. Thus, the possessors of the stock have the shares have the potential to make money from the increasing value of the company.
You might be asking, ‘How do the investors, those who have the stock or shares, make money?’ The answer is simple. As the value of a company increases or decreases, the demand for stock in the company, or a piece of that company, follows. A company that is doing well, or is anticipated to do well, will generate “excitement” and the shares of stock can be traded or sold for a higher price. This trading usually takes place at a designated location called an exchange or a market; like the New York Stock Exchange (NYSE) or the NASDAQ. And to make sure there is no cheating by companies and investors, there are lots of government agencies like the SEC (Securities and Exchange Commission) that provide ground rules to regulate trading.
There are literally thousands and thousands of companies that issue stock to raise money; some are very large and some are smaller. Very large companies like Microsoft, JP Morgan Chase, and Exxon-Mobil are very influential to the economy, and the values of these companies are tracked and monitored through what is called an index. Although an index such as the Dow Jones, or the S&P 500, or the NASDAQ, is often used to portend the trend of the nation’s economy as a whole, they are quite different. For example, the Dow Jones only tracks 30 different companies! It includes entities such as Apple, Coca-Cola, Johnson & Johnson, Verizon, Walmart and a host of other mega-companies. The S&P 500 is different. The S&P tracks 500 different companies! It will also track companies such as Apple, Coca-Cola, Johnson & Johnson, but will include businesses Apple, Facebook, Macy’s, Netflix and many more. Being the S&P monitors so many different companies that span so many different segments of the American economy, it is often thought to be a better indicator of the nation’s economy over the Dow Jones. The NASDAQ index is even broader. It tracks over 3,300 different companies, funds, and stocks. The NASDAQ is not limited to US-based companies, which makes it more of an indicator of the global economy.