- [Jeff] When you watch or listen to the news,
have you noticed that there are a few topics
that always get covered?
Weather, sports, unfortunately politics,
and news about the stock market.
While maybe easy to understand the weather
or sports segments,
stock market news can feel like a secret code.
You know, some people make a lot of money somehow, but how?
If the stock market confuses you, you're not alone.
According to the Global 2014 survey,
2/3 of adults are not financially literate.
It's not your fault schools don't teach this stuff,
but the good news is you can understand
the basics quite easily.
First, what even is stock?
Imagine taking a company and breaking it into
a lot of tiny pieces.
A stock is one of those small pieces,
or a share of a company.
And when we say a lot of tiny pieces, we mean a lot.
Amazon, for instance, is made up of over 500 million shares.
When you buy a stock, you're buying one or more
of those pieces of a company.
For the most part,
you can only buy shares of public companies.
A public company is one whose shares are available
on a public market called a stock market.
While many large national companies are public,
not all of them are.
In fact of the approximately 600,000 U.S. companies
with at least 20 employees, less than 1% are public.
For example, say you really like candy
and wanna live out your Willy Wonka fantasies
by owning a piece of a candy company.
If you wanna buy shares of Mars,
the company behind M&Ms, Snickers, and Skittles, too bad.
It's a private company so you can't buy any shares of it.
Instead, you might have to settle for Hershey's,
which is a public company
and so offers its shares in the stock market.
Now that we know what a stock is, let's go back to the news.
When you hear the stock market went up,
that means that overall,
the price for pieces of public companies increased.
This doesn't mean every company's share went up,
just that across the whole stock market
people generally paid more for pieces for a company today
than they did yesterday.
But when you hear the opposite, the stock market went down,
that means that on a whole the trader's paying less
for stocks today than they were yesterday.
You may hear things like the Dow was up today,
or the S&P was down today, but what does that mean?
The Dow and the S&P, also known as the S&P 500,
are bundles of stock that are actually considered
to be representative of the stock market as a whole.
Think of it as an appetizer sampler platter
with some pieces a lot of different things.
The Dow is a collection of 30 different companies,
while the S&P 500 reflects the shares
of 500 different companies.
While people often use the Dow or the S&P 500 as stand-ins
for how the stock market is doing,
it is important to realize the stock market
is not a standard for how the economy is doing.
This may be counterintuitive since many of us associate
the economy with the stock market,
but they are different things.
The economy is a big and complex system.
So big, so complex that it's actually hard to even define.
It encompasses different metrics like the employment rate,
the prices of goods and services, taxes,
and a myriad of other factors all interrelated
and affecting one another.
Because the economy as a whole is so big and complex
but the stock market is relatively easy to understand,
the Dow goes up, Dow goes down,
many people use a stock market as a substitute
in their minds for the economy as a whole.
Think of the entire economy like a football stadium.
The stock market is like the scoreboard.
It tells you a lot of useful information
about what's going on inside the football stadium:
the score, player stats,
the number of people in attendance,
but you never say the entire football stadium
is the scoreboard.
It may be an important part of it,
but there's so much more to the economy
than the stock market.
In fact, there are times when the stock market
and the economy can become disconnected.
For instance, during the 2020 coronavirus pandemic,
the stock market is reaching new highs.
Millions of Americans, however,
are expecting financial disaster.
How can that be?
The answer's in the fact that a booming stock market
only directly benefits those who own stock.
According to "The New York Times,"
84% of stock owned by Americans
belong to the wealthiest 10% of households.
That means when the stock market's doing well,
those at the top benefit the most.
According to one of the most influential economists
of the 20th century, Milton Friedman,
a CEO is an employee of the owners of the company,
i.e. the shareholders.
This means her only responsibility is to maximize profit.
Since profit is revenue minus cost,
her job is literally to keep costs down.
A major cost for many companies is salaries and benefits
for its workers.
If a company were to announce raises
for all their employees,
it would certainly benefit the finances of those employees.
However, it would make the cost of doing business to go up.
So according to Friedman,
in order to do her job and increase stock prices,
a CEO would look to keep employee's compensation down.
So even if you work for a company
whose stock prices is going up,
it doesn't necessarily mean
your economic fortunes are improving.
So how do average people like us get stocks?
And how do you make sure you make money
and don't lose money?
There's no shortage of companies or apps
that will allow you to buy or sell stocks,
together called trading.
Do some research before picking one
as many may have fees that outweigh any money
you expect to gain by trading.
Once you set up a stock trading account,
called a brokerage account,
trading a stock is actually pretty easy.
A simple stock trade can be broken down into three steps.
Buy one or more shares at the price
the market is selling them.
Two, wait some amount of time.
It could be minutes, days, months, years, or even decades.
During this time, the price of the stock will change
for all kinds of reasons
that people spend their entire lives trying to understand.
Three, sell those shares at the price
the market is buying them.
That's it.
There are more complicated ways of investing
into the stock market, but this process is a basic one.
Buy something, wait until the price change,
and then sell it.
You want the price to go up after you buy something,
but it might go down.
To make money, hopefully you can follow
the conventional wisdom of buy low, sell high.
You might be wondering, how do I know if the value
of a stock is going up or down?
Unfortunately, you don't.
That's sort of the whole point of the stock market.
When you buy a stock, you're essentially making a bet
that over time the stock will become more valuable
than it was when you bought it.
Prices, however, can go down.
Meaning you might find yourself selling your shares
for less than you paid for them.
That's how you lose money.
Since no one knows the future, in general,
it's pretty foolish to think
that you can time the stock market.
Whenever you hear someone with flashy stock market tips
or no-lose trading strategies,
they're almost certainly lying
and trying to sell you something.
No one knows how to make guaranteed money
in the stock market.
If they did, they would keep the secret to themselves
and spend all their time making money that way.
It's similar to when you see
scam exercise products advertised that promise easy results.
It's just for suckers.
The tried-and-true way to make money in the stock market
is slow, boring investing
so you have money when you're older.
Buy some stocks and don't sell them again for ages,
even if the market goes down.
Even if the market's sores.
A good way to do this is with retirement products
such as IRAs and 401ks.
Over the long run, the stock market has trended upwards,
which is why a steady, unexciting investment plan
is usually the best one.
Again, like exercising products, if you wanna get healthier,
the tried-and-true way is consistent diet and exercise,
not the quick gimmicks.
To wrap things up,
while the basics of the stock market are easy to understand,
buy, wait, sell,
before you do any investing,
it's important to do much more research
than this video provided.
Talk to qualified financial planners,
people who you trust to be looking out
for your financial wellbeing
and not trying to make a quick buck.
There's no rush.
The stock market isn't going anywhere
and neither other news segments reporting on it.
Hopefully, however, now you understand a bit more
of what those stories mean.
(upbeat instrumental music)