The Money Club for Young Adults
How Financial Markets Work
John Q Public has the ability to earn more from stocks and bonds than if he left his savings in a bank account.
To expand, a company can raise money in two ways:
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debt: take out a bank loan or sell bonds
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in return, company must pay interest on the debt
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equity: sell shares of stock
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stock is sold to the public who then become part owners in the business. Unlimited upside (if company does very well) and unlimited downside (if company does poorly).
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company will often pay a small dividend.
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if the company does well the price of the shares will go up over time.
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The New York Stock Exchange produced this video in 1952 to educate and promote
stock ownership. Many people at this time were highly suspicious of investing in stocks (the scars from the 1929 to 32 stock market
crash had not yet fully healed).
What is a Stock Index?
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made up of a basket of stocks
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value is computed from the prices of the basket of stocks (typically a weighted average)
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a measure performance of that basket of stocks
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a tool used by investors to describe the market, and to compare the return on specific investments
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provides a benchmark to compare alternatives
Examples of Indexes:
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S&P 500: 500 largest US companies traded NYSE
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Dow Jones Industrial Average: 30 large US companies
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Russell 2000: 2000 largest US companies
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S&P TSX Composite: 250 largest companies TSX
What is a Stock Exchange?
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a market in which securities are bought and sold
Examples:
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Toronto Stock Exchange (TSX) in Canada
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New York Stock Exchange (NYSE) in US
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Nasdaq in US
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Over the counter exchanges