The Stock Market
What do we mean by the term ‘stock market’?
Definition: it is a place where shares of public listed companies are traded. A stock (also known as a company’s equity) is a financial instrument that represents ownership in a company or corporation and represents a claim on its assets and earnings.
How does it work?
The stock market works through a network of exchanges. Companies list shares of their stock on an exchange through a process called an initial public offering. As investors buy those shares, it allows the company to raise money to grow its business. Then investors can buy and sell shares among themselves. The supply and demand help to determine the price for each object.
First, buyers offer the highest bid they are willing to pay but usually, it is lower than the price the sellers are asking for. This difference is called the bid-ask spread. In order for a trade to occur, the buyer needs to increase the price or the seller needs to decrease theirs. One person will have to compromise.
It may seem complicated, but computer algorithms do most of the price calculations which makes it easier to know when to bid or to sell.
How does the economy affect the stock market?
There are many factors that affect the stock market moving up or down: the political climate, social factor, interest rates, trends, and shifts in what investors prefer. One of the main reasons, however, is if the general population feels as if the economy is secure and safe, they tend to buy stock and make bigger gambles. When certain things in the world make them feel unsure, they will take fewer risks and become more conservative.
When the Stock market Crashes
A stock market crash is a sudden, rapid drop in the prices of stocks. There are several reasons why a stock market crash may happen. Some of which include catastrophic events, economic recessions, and a collapse of an economic bubble. The first two are fairly self-explanatory; a catastrophe will affect the ability of a firm to produce and an economic recession means that the activity of the whole economy decreases. But what on earth is an economic bubble? Well, to put it simply, it is a situation where the increase in the stock is caused by speculating that the stock price is much higher than its true value. But how does this lead to a stock market crash? To answer this, let’s look at one of the most famous cases where an economic bubble contributed to a stock market crash - The Wall Street Crash of 1929.
The Wall Street Crash of 1929
In the years leading up to 1929, the promise of profiting off the stock market caused people to buy shares at a very, VERY high rate, with the expectation of making huge amounts of money. This caused the formation of an economic bubble, and a cycle formed where the rise in prices caused more people to invest, causing even more rise in prices. So while the price of stocks increased more and more, the actual value didn’t rise.
And if that wasn’t enough, the way some people bought shares was by borrowing money. This meant that when the bubble collapsed and the shares they invested in lost their value, all the money they invested was lost without any profit to come from it.
And then October 24 1929 came, also known as Black Thursday. In the months before, the stock prices had already started to fall, causing investors to panic, losing confidence in the market. This panic increased even more when the Dow Jones Industrial average, the number that can indicate the success or failure of large corporations on the stock exchange, fell by 4.6%. And so on Black Thursday, the day when the stock exchange was opened, the market value immediately fell by 11% as many investors sought to sell their stocks. The next week, the Dow Jones Industrial Average fell even further. More and more investors were desperate to sell their stock and exit the market. The problem was that no one wanted to buy the rocks at the price they presented. On Tuesday 29, the day known as Black Tuesday, the Bubble burst! The stock market fell in value by over 30 billion in one day, continuing to do so for weeks until it stabilized in November.
Written by Aidana Assylbek and Togzhan Batyrbekova; edited by Anuar Burkitbayev and Alidar Kuatbekov
