This essay offers a broad description of the United States (US) and international stock markets, the interplay and globalization of these financial spheres, and ultimately the relationship between the US economy and the stock market. To develop a better understanding of the complexities of the market, the article weaves into context events of the famous Stock Market Crash and the resulting regulatory safeguards in place today. The essay is easily understood by those new to the world of financial markets and provides a springboard for exploration into the complex and sometimes risky world of financial markets.
Keywords: Great Depression; Growth Companies; Investment Company/Firm; Investment vehicle; NASDAQ; New York Stock Exchange; Primary Market; Recession; Secondary Market; Securities; Securities and Exchange Commission (SEC); Stock Exchange; Stock Market Crash; Stock Market; Globalization
Finance: Stock Markets
For the reader, a 30,000 foot view of the financial investment field for corporations, investors, brokers, and managers – the stock market - follows. Scores of businesses start small, as one or two person enterprises; with continued growth the successful develop into a partnership, and in due course a full-fledged corporation is born. Corporations need short-term money to maintain accessible inventory and capital; they usually accomplish this by borrowing directly from banks. When a corporation needs longer-term financing, funds can be obtained by selling off portions of the business in the form of common or preferred stocks. These same stocks attract investors who often trust their monies to large securities firms or dealers who specialize in investing. The expectation is that the professionals working for the firm will handle the investor's money well, with many years of expertise guiding their decisions. The Stock Market is the trading field for exchanges worldwide.
Defining "The Markets"
The stock market takes two forms: A virtual (electronic) marketplace and the other a true, physical marketplace. The market, put simply, is the venue that facilitates the selling and trading of securities (primarily bonds and common stock); the employees are known as 'stockbrokers.' The brick and mortar stock exchange on Wall Street, USA, brings to mind images of tumultuous crowds of traders and investors shouting orders to sell or buy - the classic picture of rapid decision-making based on indicators, gut instinct, or computer-directed trading recommendations. The US market consists of stock exchanges, the vehicles by which securities are bought and sold. The size of the US stock market, in today's dollars, is $51 trillion. The short list of what comprises "the stock market" includes stock exchanges, commodities, bonds and other exchanges, a few of which are listed below:
- The New York Stock Exchange
- The Dow Jones Industrial Average
- NASDAQ (National Association of Securities Dealers Automated Quotations system)
- OTCBB (Over the Counter Bulletin Board)
- Pink Sheets
United States Stock Exchanges
The New York Stock Exchange (NYSE), nicknamed "The Big Board," is the oldest and largest dollar volume bidding market for stocks in the United States. The NYSE, situated on Wall Street, obtained its first publicly traded company in 1792. Public trading of the over 2,700 securities on the NYSE is driven by supply and demand; an economic challenge of changing equilibrium driven by sellers and purchasers in an auction-like environment. In 2008 the NYSE acquired the American Stock Exchange (AMEX), the second largest stock exchange in the United States (Amex members approve buyout, 2008).
- The Dow Jones Averages are stock market indices that express the U.S. economy in three distinct sectors: Industry, transportation and utilities. The averages are calculated from a compilation of data from thirty companies in these sectors.
- The NASDAQ is the largest electronic stock-bidding market in the US. There is growing preference for electronic exchanges because this mode increases competition while offering equal access for large and small investors alike. The NASDAQ Composite is a listing of stocks, and their composite values; it represents a tool characterizing its component stocks, all of which have some common characteristic. For example, component grouping may be those trading on the same exchange market, being participants in the same industry, or having similar market capitalizations (the calculated value of a company). The NASDAQ is considered an indicator of stock performance in technology and growth companies - those whose rate of growth significantly exceeds that of the average in their field.
- OTCBB stands for the Over the Counter (OTC) Bulletin Board, a structure that provides an electronic quote system for numerous over the counter securities not listed on the national or the NASDAQ exchange. The OTCBB provides brokers with real-time quotes, last-sale prices, and volume information. Anyone who subscribes to the system can use the OTCBB to look up prices or enter quotes. Like the larger, more familiar exchanges, eligibility rules for the OTCBB require SEC registration of current financial reports.
- Pink Sheet Stocks are over the counter trading securities that are not large enough to be listed on the bigger exchanges. These smaller company stocks are primarily high risk; considered some of the most speculative investments. The Pink Sheets are, quite literally, a daily pink-colored publication of the 'bid and ask' prices of thousands of over-the-counter stocks for companies who are smaller in asset size and have lower share prices.
International Stock Market Exchanges (Non-US)
International stock exchanges, far too numerous to list here, include the London Stock Exchange, the Bourse de Paris, the Tokyo Stock Exchange, and the Hong Kong Stock Exchange. Globalization is pushing stock exchanges around the globe to combine and buy stakes in each other to meet clients’ demands. Today’s investor wants are simple: investors want to trade stocks of companies located anywhere in the world at a fast pace, across various classes of assets, for a cheap price. Globalizing exchange transactions saves costs in this industry since the largest single expense is building the technology to operate trading platforms (Werdigier, 2007).
The catastrophic stock market crash of 1929 ended the prosperity of the era and brought upon the United States a disaster never to be forgotten. Reasons for the crash remain uncertain, though the most solid theory speculates that investors rapidly selling their stocks for profit led to unrest and a groundswell of anxious people following suit. The businesses that relied on investors' money began to fail; vast numbers of people lost their jobs as a result. Without jobs, people withdrew money from their checking and savings accounts out of fear for their very survival. The banks simply could not meet the demands for monies, having invested much of the depositors' cash into the spiraling stock market, so many of the financial institutions failed right alongside other weakening companies. The entire economy began a treacherous downward spiral, ultimately leading to the Great Depression. Speculation that the Stock Market Crash of 1929 was caused by a lack of formal rules and regulations led to Franklin Delano Roosevelt's urging of Congress to pass the Securities Act of 1933 and the Securities Exchange Act of 1934. These two legislative acts led to strict regulation of how new stocks were issued and how stocks were to be traded. Today, any company that sells stock (corporations) must register with the Securities and Exchange Commission (SEC), which provides investors with the assurance of a much more stable market.
Fears of Market Crash Assuaged
In October, 1987, apprehension was mounting as stock prices declined precipitously. The market had been doing so well for so long; few were surprised when the decline began. By the time the Dow Jones average had dropped over 500 points on October 19th, panic ensued; the day was dubbed "Black Monday." Yet, a full stock market crash was never realized, a credit to Congress' proactive 1934 legislation. Today, strict barriers to deception are enforced; for example; firms are required to submit proof to the SEC of how much money they have on loan to customers in relation to their cash reserves. Scrutiny of every report submitted assures that firms have enough cash on hand to continue operations for a specified amount of time, thereby protecting the customers' financial well-being.
Other safeguards exist, including "Regulation T," which requires that purchasing of stocks on credit is permitted only when the investor deposits at least 50% of the market value of the stock with the broker (Dalton, 2001). In the 1920's, the market was taught a lesson a little too late by a dangerous precedent that allowed purchase of stocks with a mere few dollars on deposit. Additional legislation brought forth the Glass-Steagall Act of 1930, which provided regulatory controls in defining commercial versus investment banks. The act disallowed financial intermediaries (investment banks) that advise clients on mergers and acquisitions to function as commercial banks (whose main business functions are taking deposits and making loans for commercial...
Phil Nast, retired middle school teacher and freelance writer
Found in:mathematics, social studies, 3-5, 6-8, 9-12
Recent activity in international stock markets demonstrated how interconnected the economies of nations have become. The following lessons, activities, resources, and videos provide a basic understanding of stocks and the market.
- How Are Stock Prices Determined? ( PDF, 1.7 MB, 295 pgs. Intermediate students discover that prices are determined by the behavior of many individuals in the market. Scroll to lesson six, p. 46.
- NYSE Made Easy Students in grades 6-12 learn terms associated with the New York Stock Exchange and how to read a stock market report found in newspapers or online.
- Here's Your Chance to Make Millions in the Stock Market (Part 1) In Part 1, students in grades 9-12 learn how efficient markets affect investor's efforts to time the stock market. Parts II and III are an interactive historical simulation that gives students a chance to make investment decisions.
Getting Fancy: The Bulls, The Bears, And The Pigs! ( PDF, 1.7 MB, 295 pgs.) Advanced students learn how buying on margin and selling short can increase potential gains on stock purchases, but at the risk of greater potential losses. Scroll to lesson nine, p. 92.
- Teaching Financial Crises Eight lessons for students in grades 9-12 that examine the financial crisis of 2007. Lessons can be viewed online. Visuals can be downloaded. Aligned to economics standards. A print version can be purchased.
Activities & Games:
- Play A Virtual Market Starting with a virtual fortune, students can trade traditional stocks or use call options.
- The Stock Market Game An online simulation of global capital markets for students in grades 4-12. Registration is free. A Teacher Support Center is provided and Apps are available. The Stock Market Game Teacher’s Guide ( PDF, 705 KB, 20 pgs.) includes suggestions for extended activities.