ctivnan
12/12/07, 11:08 AM
A share of the action
Stock markets provide a place where company shares (or "stock") can be bought and sold, and where firms can issue new shares. Among the most famous stock markets -- also called "stock exchanges," after the institutions that run them -- are the New York Stock Exchange (NYSE or "Wall Street"), the London Stock Exchange (LSE) and the Deutsche Borse.
By buying a company's shares, individuals own a part of that company and can receive a share of its profits, paid in the form of dividends. In practice, stock markets are dominated by institutional investors, such as pensions funds and unit trusts. These institutions pool the savings of individuals and invest in a portfolio of shares and other securities to reduce risk.
As well as receiving dividends, investors hope that share prices will rise over time. A period of strongly rising prices is called a "bull market," in contrast to a "bear market," in which share prices fall. Each stock exchange has a number of indexes that reflect the average trend in share prices, such as the Dow Jones Industrial Average (DJIA) on Wall Street or the DAX in Germany.
In theory, the price of a company's shares should reflect investors' rational expectations of the company's future profits. This means that stock-market indexes are indicators of the expected future growth of the economy. But expectations and demands can also be driven by irrational factors.
During the mid-1630s, Holland experienced "tulip mania." For a short time the Semper Augustus tulip bulb cost more than a house in Amsterdam. And in the late 1990s, investors poured money into new internet companies ("dot-coms") that were growing quickly, although few were making profits.
In both cases, rising share prices attracted more investors, and so prices continued to rise. And in both cases, the bubble burst. By July 1637, tulips were worthless, and the dot-com crash of 2001 caused thousands of people to lose their jobs and savings.
by James SchofieldBusiness Spotlight, January - February 2007
Stock markets provide a place where company shares (or "stock") can be bought and sold, and where firms can issue new shares. Among the most famous stock markets -- also called "stock exchanges," after the institutions that run them -- are the New York Stock Exchange (NYSE or "Wall Street"), the London Stock Exchange (LSE) and the Deutsche Borse.
By buying a company's shares, individuals own a part of that company and can receive a share of its profits, paid in the form of dividends. In practice, stock markets are dominated by institutional investors, such as pensions funds and unit trusts. These institutions pool the savings of individuals and invest in a portfolio of shares and other securities to reduce risk.
As well as receiving dividends, investors hope that share prices will rise over time. A period of strongly rising prices is called a "bull market," in contrast to a "bear market," in which share prices fall. Each stock exchange has a number of indexes that reflect the average trend in share prices, such as the Dow Jones Industrial Average (DJIA) on Wall Street or the DAX in Germany.
In theory, the price of a company's shares should reflect investors' rational expectations of the company's future profits. This means that stock-market indexes are indicators of the expected future growth of the economy. But expectations and demands can also be driven by irrational factors.
During the mid-1630s, Holland experienced "tulip mania." For a short time the Semper Augustus tulip bulb cost more than a house in Amsterdam. And in the late 1990s, investors poured money into new internet companies ("dot-coms") that were growing quickly, although few were making profits.
In both cases, rising share prices attracted more investors, and so prices continued to rise. And in both cases, the bubble burst. By July 1637, tulips were worthless, and the dot-com crash of 2001 caused thousands of people to lose their jobs and savings.
by James SchofieldBusiness Spotlight, January - February 2007