What is the Stock Market?
In this article
With US stocks trending higher with barely a hiccup for more than a decade, investing in the stock market has been an incredibly profitable decision for those who have taken the plunge, but what is the stock market? The stock market allows investors to trade in publicly owned companies from around the world world. Companies can spread risk and raise capital, allowing them to grow and diversify into new markets.
Members of the public can share in the successes of the world’s largest companies through rises in share price, dividends and can even participate to a degree in the running of companies through shareholder meetings.
The Dutch East India Company
The first company to issue stock to the public was the Vereenigde Oostindische Compagnie more commonly known as the Dutch East India Company. Formed under the direction of the Dutch Republic in 1602, the Dutch East India Company grew to the point where it had its own standing armies and was arguably a nation-state in its own right.
Dutch East India Company shareholders effectively became shareholders in the Dutch Empire, profiting from the global spice trade and rampant colonialism of the day. Though the Dutch East India Company was the first publicly traded company and the only stock traded when the Amsterdam Stock Exchange launched in 1611, its success was quickly replicated over the coming decades and centuries with public companies and stock exchanges springing up all around the world.
The Dutch East India Company became a blueprint followed by the world’s corporations to this day and is the most studied and discussed financial entity of all time.
The stock market comes to America
Although British companies such as the Hudson Bay Company dominated the US fur trade in North America, it wasn’t until the end of the 1700s that stock trading first really took hold in America with the Buttonwood Trade Agreement. Merely a group of merchants who met to trade stocks and bonds, this group went on to become the New York Stock Exchange that dominates the global equity market to this day.
The stock market has empowered US companies to dominate global trade, with an abundance of capital available to them to fund their next endeavours. Though they are yet to employ soldiers or build empires, companies such as Facebook and Google have governments around the world on high alert and understandably wary of a dystopian future reminiscent of a sci-fi movie.
Investing goes digital
From an affluent gentleman’s club to the cacophony of trades being shouted from the world’s trading floors, stock trading and investing is now carried out largely from behind a computer screen. Discount brokerages abound and competitive price pressures have created a very attractive market for retail investors on a limited budget. Index products and derivatives have made diversified portfolios accessible to the average Joe, letting anyone and everyone realise returns once reserved for the uber-rich.
The robots aren’t coming – they are here
Not just carried out via computer, the majority of the world’s trading decisions are now actually made by computers. The software doesn’t blink when the market crashes, it buys. When humans are panicking and selling there is always an algorithm somewhere in the world ready to step in and take your shares. Trading algorithms never sleep and are responsible for some 70% of global volume in the stock market.
Though bad traders will often whinge about how a bot took out their stop, without algorithmic trading activity, there may have been no one willing to honour that stop in the first place.
Algorithmic trading is also becoming more and more accessible with an abundance of tutorial material available and languages getting simpler and simpler with time.
What is the Stock market? A tool for wealth creation like no other.
In all of the history of finance, no innovation has created more wealth than the stock market. The odd bad month or bad year aside, eventually, the market always recovers and the trend over time is inarguably up. Though a few companies disappear never to be seen again and greedy traders will always lose, a patient investor in the stock market has always been rewarded and absent total global destruction, this trend will continue well beyond our lives.
Since the horror crash of the GFC, American stocks have barely stopped for breath, trending consistently higher and higher delivering incredible returns for long term investors and blind dip buyers. With 2020’s coronavirus driven panic now long behind us and dwarfed by the gains generated since it seems nothing can stop the global stock market’s march higher. What is a pip vs a point?
Index products, exchange-traded funds and contracts for difference have democratised investing, eliminating barriers to entry and giving anyone and everyone the opportunity to participate in the greatest wealth creation mechanism of all time. With just a small amount of savings, a mobile phone and a 3G connection, almost anyone can generate wealth by investing in the global stock market.
With the money printers on overdrive, politician’s efficacy being judged by the stock market’s performance and bankers offering not much at all when it comes to term deposits, the once conservative public has no choice but to invest if they want to stay ahead of the game. Sleeping on the 2009-2020 rally was a very costly mistake for anyone who considered investing but failed to dive in, will you make the same mistake again in the current cycle?
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst
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