How does the stock market work? - Oliver Elfenbaum

0:06In the 1600s0:07the Dutch East India Company employed hundreds of ships0:11to trade gold, porcelain, spices, and silks around the globe.0:16But running this massive operation wasn’t cheap.0:19In order to fund their expensive voyages,0:21the company turned to private citizens–0:24individuals who could invest money to support the trip0:27in exchange for a share of the ship’s profits.0:30This practice allowed the company to afford even grander voyages,0:34increasing profits for both themselves and their savvy investors.0:39Selling these shares in coffee houses and shipping ports across the continent,0:44the Dutch East India Company unknowingly invented the world’s first stock market.0:50Since then, companies have been collecting funds from willing investors0:54to support all kinds of businesses.0:56And today,0:57the stock market has schools, careers, and even whole television channels1:02dedicated to understanding it.1:04But the modern stock market is significantly more complicated1:07than its original incarnation.1:09So how do companies and investors use the market today?1:14Let’s imagine a new coffee company that decides to launch on the market.1:18First, the company will advertise itself to big investors.1:22If they think the company is a good idea,1:24they get the first crack at investing,1:26and then sponsor the company’s initial public offering, or IPO.1:31This launches the company onto the official public market,1:34where any company or individual who believes the business could be profitable1:38might buy a stock.1:39Buying stocks makes those investors partial owners in the business.1:44Their investment helps the company to grow,1:46and as it becomes more successful,1:48more buyers may see potential and start buying stocks.1:51As demand for those stocks increases,1:54so does their price, increasing the cost for prospective buyers,1:58and raising the value of the company's stocks people already own.2:01For the company,2:03this increased interest helps fund new initiatives,2:06and also boosts its overall market value2:09by showing how many people are willing to invest in their idea.2:13However, if for some reason a company starts to seem less profitable2:17the reverse can also happen.2:19If investors think their stock value is going to decline,2:22they’ll sell their stocks with the hopes of making a profit2:25before the company loses more value.2:27As stocks are sold and demand for the stock goes down,2:31the stock price falls,2:32and with it, the company’s market value.2:34This can leave investors with big losses–2:37unless the company starts to look profitable again.2:40This see-saw of supply and demand is influenced by many factors.2:45Companies are under the unavoidable influence of market forces–2:49such as the fluctuating price of materials,2:51changes in production technology,2:53and the shifting costs of labor.2:56Investors may be worried about changes in leadership,2:58bad publicity, or larger factors like new laws and trade policies.3:03And of course,3:04plenty of investors are simply ready to sell valuable stocks3:07and pursue personal interests.3:09All these variables cause day-to-day noise in the market,3:13which can make companies appear more or less successful.3:16And in the stock market,3:17appearing to lose value often leads to losing investors,3:20and in turn, losing actual value.3:23Human confidence in the market has the power to trigger3:26everything from economic booms to financial crises.3:30And this difficult-to-track variable3:32is why most professionals promote reliable long term investing3:36over trying to make quick cash.3:38However, experts are constantly building tools3:41in efforts to increase their chances of success3:43in this highly unpredictable system.3:45But the stock market is not just for the rich and powerful.3:49With the dawn of the Internet,3:50everyday investors can buy stocks3:52in many of the exact same ways a large investor would.3:56And as more people educate themselves about this complex system3:59they too can trade stocks,4:01support the businesses they believe in,4:03and pursue their financial goals.4:05The first step is getting invested.