What are Stocks and Stock Markets?
Stocks, also known as equities, represent partial ownerships of a company. Stocks are the primary way companies raise capital for various causes, such as the development of new products and the expansion of the business. There are a variety of stock options, like penny stocks, common stocks and growth stocks. Some of these are high risk and high reward, while others are low risk and low reward. The price fluctuations of stocks, which create risks that investors need to be aware of, are driven by the supply and demand as well as global and domestic economic trends.
Stock markets, which can be physical or digital, are places where people can buy and sell stocks – their shares in companies. According to TD Bank, “an easy way to think about the stock market is to consider it as a network of stock exchanges where traders and investors buy and sell shares of publicly traded companies.” Brokerage firms act as an intermediary to connect buyers and sellers together.
Specific locations where people can trade stocks, such as National Association of Securities Dealers Automated Quotations (NASDAQ), are called stock exchanges. However, due to the advancements in technology, stock markets became much more prominent online, as online stock markets offer much faster transactions.
Benefits and Risks
Even though there are many risks associated with trading stocks, there are many potential benefits that may outweigh the risks for some. People can gain capital from buying shares of companies that grow over time, leading to a potential increase in gains. Another benefit of investing in companies is that many, if not most, companies pay sums of money that reflect their profits to investors – called dividends – creating more of an incentive for people to invest. Mr. Munson, a teacher at Centreville High School, stated that “[one] cannot get wealthy without investing in stocks. In fact, an individual doesn’t need to earn that much money [from jobs]. Wealth comes from investments and only from investments.”
However, there still are risks involved with stocks. Stocks are based on a risk to reward system. When investing in a company, the company’s stocks carry the risks that the company faces every day. However, as David Shi, a senior at Centreville High School states, “while it carries the risks of the company, it also reaps the rewards of the company as well,” which means that careful thinking and measuring the risks and rewards that entail the stocks is necessary to succeed in investing in companies. There are no guaranteed rewards for investment, as prices of stocks fluctuate every day. For beginners, however, who want to start investing, reliable stocks such as Apple, Google, and Amazon are recommended, as they are very stable, low risk-low reward stocks.
History of Stocks
Even though stocks and the stock market seem like modern inventions, suddenly appearing in the 20th century, they have actually existed for hundreds of years. One of the earliest examples of companies selling stocks was the Dutch East India Company (VOC) in the 17th century, which issued bonds and shares to fund its activities. Through the Amsterdam Stock Exchange, which was established in 1602, investors were able to buy and sell shares of VOC; the Amsterdam Stock Exchange is considered to be one of the earliest stock exchanges in the world.
Throughout the 17th century to the modern 21st century, stock markets faced extreme growth and challenges, from formations of various stock markets across the world to the crash of the U.S. stock market in 1929; not only that, the great recession in ‘07 stumbled the global economy. And now, because of the fast technological advancements, it’s easier than ever to buy and sell stocks.
Impact of Technology on the Stock Market
Technology has increased the efficiency and speed of trading stocks, making transactions to be done in just milliseconds. New technology has also made it easier for people to start their stock investing with online brokerages and trading apps. There are even parent-student stock apps that allow you to invest as a minor. Technology even impacted the whole stock algorithm where computer programs such as artificial intelligence (A.I.) can trade based on predefined rules. With technology, however, some new risks appear; algorithmic trading can lead to increased market volatility and cybersecurity risks.
