The Stock Market - How Does it Work?

I've always wondered myself, why do we have to hear this every night, what the stock market is doing. Seventy record closing highs so far... Blasting through a ceiling In a record-setting IPO. Investors who've been riding the wave... - we're made to believe the economy is booming. And in America, the stock market has been mostly booming for almost 40 years, As the stock market goes, so goes the wealth and the health of the American economy.

What the market is telling us is that we are on the road to prosperity. ...a sky-rocketing stock market, and that benefits everyone. The stock market has gained almost three trillion dollars in value since the election. The actual economy, that number isn't growing as quickly as it used to. Wages have hardly budged in decades and the average American family's net worth still hasn't recovered from the Great Recession. So what exactly is the stock market measuring?


The barometer of America's prosperity has been the stock exchange. Look at the Dow, it's currently up by... The NASDAQ finally hit 5,000. Investors are salivating... -Dividends!  A new kind of gold rush... We are all watching this global economic expansion... We are now in historic territory... A stock buy-back... It's a fundamentally psychopathic philosophy. It helps to imagine a very simple business like a lemonade stand that I started. It’s progressing very well. I’m killing it. But I’m thinking bigger. I tried to get a loan, but the bank said it was too risky. The rich investors weren't buying. I can go public, giving anyone who wants to, the chance to invest in my business... ...through something called an initial public offering or IPO. Investors pay a certain amount, say a dollar, to own a small part of my business. I’ll sells a bunch of shares.  And I grow my lemonade empire, which means more profits. I can put some of those profits towards developing new products. I can also give some of that money back to my investors. These are called dividends. I don’t have to do this, but it does help get people excited about my company and more likely to buy more stock. I know this lemonade stand thing is gonna be huge for twice what I paid for them. That's the stock market. It's people buying and selling tiny pieces of companies, based on how much they think those pieces will be worth in the future. Except in real life, it's happening thousands of times a second, all over the world.


There are stock markets everywhere, but the New York Stock Exchange is the big kahuna. It's been around since 1792, when 24 stockbrokers put on their finest short pants and top hats and got together under a buttonwood tree on Wall Street in New York City.

Today, it's where shares in big traditional companies like IBM and GE are traded. The NASDAQ is the cooler younger brother. It was born in 1971 and doesn't have a physical location. All the trading happens electronically. That's where you find tech companies like Apple and Facebook. So, in America if you want to know how the stock market is doing, you want to know how both these exchanges are doing. That's where indexes come in. They take a whole bunch of share prices and transform them into one clean number. The 500 tracks 500 of the largest companies on both exchanges, While the Dow is a lot more exclusive. It only follows the 30 companies it considers the most important. In 2015, it booted out AT&T and replaced it with Apple. The Dow and S&P are big American indexes, but other countries have their own indexes to measure their stock markets. The German stock index, Dax...London's FTSE 100 index... The Nikkei index... The Shanghai index... but that wasn't always the case. One guy, and it was almost always a guy, used to call all the shots.


They really exercised very tight control over these businesses. This all began to change in the beginning of the 20th century. We start to see the rise of companies like General Motors and General Electric and RCA. That if you allow the public to buy shares, you can grow a lot faster. Shareholders want to make money. So if the CEO makes a really bad decision, they'll start selling their shares, which will drive the price down. The opposite is also true. The possibility of a future payout encourages people to invest in risky new ideas. That's the whole idea of the stock market as a force for good. It drives companies to make good decisions, so they have more money to give back to shareholders and more money to grow and create jobs, and that's good for everybody.

By the middle of the 20th century, the American public corporation was proving itself one of the most effective and powerful and beneficial organizations in the world. There's a sense of growing prosperity, and the telephone company is a grateful participant of shared American prosperity. A new era begins, make the system more democratic, increase the flow of capital for the financing of business.


The corporation really was supposed to be a vehicle for providing investment opportunities, not just to the very, very wealthy, but to average Americans. It's generating superior returns for investors. Don't you think we ought to invest?

Millions of secure, well-paid jobs. It's producing innovative products that are bought around the globe. Executives and directors viewed themselves as stewards or trustees of great public institutions that were supposed to serve, not just shareholders, but also bondholders, suppliers, employees, the community. Buick has provided a stomping ground for the cowboy-and-diaper set. And Buick's general manager, Ivan Wiles, drops in. Du Pont... Modern chemistry and modern industry join hands in serving our modern America and for people who knew how to play it right, trading their stocks could build a fortune.

Like this guy. I've been working on the railroad... Warren Buffett... Biggest Wall Street titan of them all. -America's most famous investor. Investor Warren Buffett is worth 84 billion. Value investing, careful analysis of a company, looking at their balance sheet, looking at their business. Here's a tip from the man himself. Buy an S&P 500 low-cost index fund. Basically, you're hitching your wagon to the stock market. The other option is to give your money to professional investors, who for a fee, try to beat the stock market. Buffett once bet a hedge fund a million dollars that over ten years, an index fund would make more money, and he won. Picking stocks is a hard game but there's one popular strategy.

There’s this guy, John Maynard Keynes. You can remember him by his epic mustache. He came up with it. Keynes was a Nobel Prize winner and one of the most influential economists of the 20th century, and he noticed that newspapers would do this thing. They would have a full page of the newspaper dedicated to photos of pretty faces, and you were supposed to pick the six prettiest faces and mark them down in rank order and mail them in and the winner was the person whose choices matched the crowd's.

Let's think about that contest. Do I really just pick what seem to me the prettiest faces? No, I should pick what other people think are the prettiest faces. That's kind of what happens in the stock market. It's the most popular story people believe about those companies. Sometimes those stories are backed up by facts.

Chipotle stock has plunged more than a third. This comes after several outbreaks, including E. coli, salmonella and norovirus were linked to the chain. An emissions scandal rocking Volkswagen is sending its stock into a free fall. But sometimes those stories are all hype.

Internet companies are the hottest and most profitable investments in this generation. They've driven the value into the stratosphere. Lycos, Excite, Yahoo, Google, Facebook, Instagram... Those internet stocks continue their meteoric rise. The narrative in the 1990s was internet companies are going to dominate. These companies shouldn't be trying to make profits. That's a good story, which is partly right. We do have companies like Amazon, Google. The problem is that nobody had any way to calibrate this story. How high should the market be? Is it a boom without end?

You know something's wrong when everyone's talking about something like this. It's a bubble, it's like a snowballing effect. It keeps getting higher and higher. It can't go on forever. The Dot Com Honeymoon is coming to a close in many parts of the world. Many dot coms have become dot bombs. 300,000 tech jobs are now gone. It's described as nothing short of breathtaking. A point drop never before seen on the US market. It left traders and investors shell-shocked.

When stock market bubbles burst, it doesn't just hurt investors, it wreaks havoc on the whole economy. Millions of people can lose their jobs, companies go under, and pensions get pummeled. But even when the stock market is up and investors are making money, that can hurt the economy, too. We are heading towards the most acute shortages of energy since World War II. Motorists began lining up before dawn in hopes of getting enough gasoline to take them through the day. Are you mad about the way prices have risen? I am thoroughly discouraged and disgusted with the whole thing. There was a general sense of concern that something had gone wrong in the American economy. And eventually, the finger got pointed at the way our large public corporations were operating and being run.

An economist so famous, he was invited onto popular talk shows to help explain his philosophy. Did you ever have a moment of doubt about capitalism? And whether greed's a good idea to run on? Tell me, is there some society you know that doesn't run on greed? He thought it should have exactly one spoke, shareholders.

In 1970, he published a blockbuster op-ed. The famous editorial that ran in in which he said that because corporations were owned by their shareholders, the only obligation of business was to make profits. You own the company, that's right, you the stockholder, and you are all being royally screwed over by these bureaucrats. Greed, for lack of a better word, is good. And corporations took his advice. They start tying the top executives' pay to share price performance. Well, if 80% of the CEO's pay is based on what the share price is going to do next year, he or she is going to do their best to make sure that share price goes up.

Even if the consequences might be harmful to employees, to customers, to society, to the environment or even to the corporation itself in the long-term. In the short-term, like cutting costs or buying back a bunch of their own shares to decrease the supply and artficially bump up the price.

Between 2007 and 2016, that's how companies in the S&P 500 spent more than half their earnings. Another 39% went to their shareholders as dividends, which didn't leave much left to raise wages or expand or develop new products, things that are good for the economy in the long-term. If you have a long-term view that 100 years from now, I still want to be a company, maybe making something different, but I still wanna be here. So the choices that you make in terms of investments and people and in capital are different than if you want to make an investment and generate a return within 24 months. To switch its factories from making printing and writing paper to making tissue paper. But then a hedge fund bought up a bunch of shares and pushed the company to cut costs instead. Their argument would be, We don't need to do that. What I'd rather see you do is to increase the dividend." As management, we disagreed with that. We offered concessions. We'd take a cut in pay just to leave the doors open.

Wausau Paper says it plans to close the Brokaw Mill by March 31st... Leaving about 450 people without work. The news is devastating, not just to the workers who will lose their jobs, but to the community of Brokaw, where the paper company got its start.

December 7th, and I'll never forget that, that's when Pearl Harbor was, but that's the day I was burying my father, and it's the day I lost my job. Then the next day, I came to work, and it was just a madhouse. You know, people just crying. You know, "Why?" You know? And... It was a shock. My concern is we've evolved to this much shorter-term view on shareholder rights, versus a longer-term view on stakeholder responsibilities. This is a trend that's been going on for a while and has gotten even more powerful and important. It's seriously threatening the ability of our corporations to pursue the kinds of projects that lead to long-term corporate sustainability and economic growth.

These are things that are bad for the economy overall, but can be great for a company's short-term profits and that's what the stock market cares about. The stock market got off to an impressive start...

Another record today... A day for the record books on Wall Street... The US economy charges ahead and so do the bulls on Wall Street. This was a big day on Wall Street... The S&P 500 has raced out to a new all-time high.

In 1973, the average CEO made about 22 times more than the average worker. By 2016, it was 271 times more. And as the stock market has grown bigger, fewer Americans have benefited. The share of Americans invested in the stock market is at its lowest point in 20 years, as the middle class dropped out. So it's no surprise that as stock prices have gone up in the United States, so has inequality, but it doesn't have to be this way.

Stock markets give people a chance to decide which companies deserve to succeed, which ideas are worth a gamble. There's something about giving people games to play. You look at successful countries and they all have stock markets, and countries that tried to shut them down are coming around and instituting them now regardless whose interest they take into account.

Most of us are thinking about our long-term futures. We care about our neighbors and our children and our grandchildren. We have values and morals and want our companies to make money by doing things that are good for the world and not by harming people and destroying it. That's what most shareholders really want.   

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