The Stock Market
Stock market investments help private individuals, government institutions, and multinational corporations consolidate financial security and create independent wealth. The stock market functions to promote liquidity, or the ease of which any asset is converted into cash, within the global economy. Be advised that the stock market is a pricing mechanism that discounts future growth, rather than an immediate present value snapshot of the economic landscape.
Initial Public Offering (IPO)
The stock market matches corporations looking to raise cash alongside people and institutions that are in search of investment opportunities. At the initial public offering (IPO), a corporation will issue shares of stock to the public through the stock market. At that point, the corporation receives cash equity financing, while investors are awarded with ownership stakes in the business. After the IPO, investors trade shares directly between themselves in the stock market. The New York Stock Exchange and NASDAQ are the most prominent U.S. stock markets.
The stock market organizes traders and individual securities according to auction format. For each individual security, trades clear at the point where the lowest asking and highest bidding prices intersect. From the trading floor, the stock ticker transmits real-time stock price information through global computer networks. For individual stocks, the ticker presents the price and volume data of each trade. Volume refers to the number of shares that trade hands during a transaction.
Because shares of stock represent corporate ownership stakes, their values fluctuate in conjunction with corporate earnings. Share prices increase when the earnings outlook for a particular corporation improves. For example, ExxonMobil and Chevron shares would advance in response to higher gasoline prices. Alternatively, shares in Best Buy and Target should lose value amid reports of weak Holiday sales. Quarterly earnings per share figures are some of the most heavily scrutinized statistics on Wall Street.
The U.S. Economy
The stock market is a leading indicator for the performance of the overall economy. In America, the Dow Jones Industrial Average, S&P 500 Index, and NASDAQ Composite are the three major stock market indexes. The Dow and S&P 500 track the performance of large capitalization stocks, such as ExxonMobil, Coca-Cola, and Altria. Alternatively, NASDAQ is associated with tech-related companies, including E-Bay and Google.
Significant losses of more than 20 percent for all three stock market indexes may confirm recession for the U.S. economy. At that point, the Federal Reserve Board and Treasury would propose interest rate and tax cuts. Lower interest rates and taxes increase liquidity throughout the financial system and encourage people to take out loans, invest money and buy goods. Going forward, the increased economic activity will improve stock market performance.
Stock market performance does expose particular social concerns. When stock market values increase, income gaps separating the rich from the poor also expand. Social unrest may soon follow, as the masses push for political reforms. In response, government officials could increase taxes on the wealthy, in order to fund programs for the middle class and poor. Conversely, a stock market crash often triggers recession and widespread job losses. The business class would then demand new leadership and tax cuts, in order to free up cash flow to finance capital projects and jobs creation.
Ironically, ‘tax the rich’ legislation exacerbates chasms separating rich from poor. Higher taxes to fund social programs often trigger massive layoffs. The Federal Reserve Board may then expand the money supply, as a stopgap measure to close the deficit between tax receipts and government spending. Inflationary policy may erode consumer purchasing power, at the same time that stock market investments appreciate. Blue States California, Illinois, and New York are associated with extreme imbalances between the proverbial haves and the have-nots.