What is the Stock Market
Here is the story of how the stock market began
Engraving depicting the Amsterdam Stock Exchange,
built by Hendrik de Keyser c. 1612, see note
"It all started with an idea about boats..."
By Alan Hull
To really understand what share trading and investing is, we should start right back at the very beginning and look at what the stock market is and how it came about. I am actually a second generation share trader and before I was even a teenager my father sat me down and explained to me what a stock market is. So here’s the story as it was told to me as a child.
A long time ago, before the stock market ever existed, there was a man we will call Mr A. One day Mr A had an idea - a great idea. It was an idea about how to build a better ship.
But it was an idea about a big ship and Mr A didn’t have enough money to build his ship. So Mr A got depressed.
In fact there were lots of men and women with lots of great ideas about lots of things. But none of their ideas ever became a reality until one day Mr A had an idea about money. His money idea was to break up his ship idea and find other people to share in it.
So Mr A formed a company and went to Mr B who was a good salesman and got him to sell ‘shares’ in his new ship building company. Mr A paid Mr B well, so Mr B worked very hard and managed to sell all of the shares. This made Mr A very happy.
In fact Mr B made so much money selling Mr A’s idea that he brokered deals between the other people who had ideas and members of the public who wanted to invest. And when Mr A’s company began to make money, he divided the profits among the shareholders. He sent money every year he made a profit.
But one of his investors, Mr C, had an idea of his own and wanted to sell his holdings in Mr A’s company to pursue his own clever idea. But it was very hard for Mr C to sell his shares because Mr A didn’t want to buy them back and there was no marketplace for shares. So Mr C started one and called it a stock market.
And that’s the ABC of how the stock market began!
Of course this is a very simple explanation of how stock markets came into existence and why we have them, but it is conceptually accurate. Stock markets serve the very serious functions of raising venture capital and facilitating the transferring of interests in companies from one investor to another. Here are some additional key points worth noting.
- Mr A and people like him are entrepreneurs
- Mr B brokers deals between entrepreneurs and investors and is called a stockbroker
- Furthermore, thanks to Mr C and the creation of the stock market, Mr B also brokers deals between investors, transferring company interests from one party to another
- When stockbrokers initially place shares with investors it is called the primary market
- When shares are bought and sold in the stock market it’s called the secondary market
- Company profits are split up and distributed regularly to shareholders as dividends
- Stock markets also regulate publicly listed companies to protect investors interests
That pretty much explains what the stock market is, so now we can move onto the really big question: What is share trading, and how is it different to investing?
Continue reading Part 1 of the Tour: What is share trading
Previous article: Knowledge is valuable
Image above: Engraving depicting the Amsterdam Stock Exchange, built by Hendrik de Keyser c. 1612" by Claes Jansz. Visscher - Geheugen van Nederland Werd gebruikt in de uitgave van Guicciardini's Beschrijving van alle der Nederlanden (edities 1612-1648). Licensed under Public Domain via Commons.
