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Stumped by the stock market slump? Start by picturing a used car dealership

December 25, 2018 in Blogs

By The Conversation

Trading stocks can be a lot like buying a used car.


Stocks have been slumping on a variety of concerns, from President Donald Trump’s ongoing trade war with China to worries about an economic slowdown and rising interest rates.

Given the many factors driving shares up or down on any day or week, it’s hard to make sense of what’s happening on Wall Street.

Based on my many years of experience teaching and writing about financial markets and frauds, I believe the best way to understand what’s happening on Wall Street – and puncture its mystique – is to imagine it as a used car dealership.

Stock markets 101

Stock exchanges are places where people trade ownership in corporations by buying and selling shares.

Partial ownership of a company comes with benefits, such as a cut of future profits and rising stock prices. But there are risks and costs as well. Share price can fall, reducing the value of one’s wealth; even worse, businesses can go under, reducing the value of ownership to zero.

About half the population owns at least some stocks, mostly in their 401(k)s. But, except for the richest 10 percent of Americans, stock holdings are usually on the smaller side.

The New York Stock Exchange, one of several in the U.S., is the largest securities exchange in the world. At a current market value of almost US$23 trillion, it’s worth more than the GDP of the U.S. and the world’s other big economies.

Stock exchanges play an important economic role by helping companies finance new investments. When a large company wants to expand, it goes to an exchange like the NYSE and offers investors a stake in its business through what is known as an initial public offering. That’s exactly what ride-hailing services Lyft and Uber plan to do at some point in 2019.

Selling used cars

However, this is not what stock trading is mainly about. Virtually all the $80 trillion or so in daily trading on the NYSE and other exchanges around the world involves someone who already owns shares of …read more

Source: ALTERNET

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