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What is a stock market?
The stock market is a place where investors buy and sell company shares, and it’s more than just a physical place, because investors can trade from anywhere in the world on stock exchanges.You can make trades from your kitchen table.
“Stock” usually refers to shares – or ownership certificates - held in a number of companies.
“Shares” tends to refer to ownership certificates in one company.
But they mean roughly the same thing.
This method of buying and selling stock – through paper certificates – has been around for a very, very long time. Modern stock exchanges were formed in the late eighteenth and early nineteenth centuries.
The London Stock Exchange was formed in 1801.
What is a stock exchange?
A stock exchange is a list of companies in which it is possible to buy (or sell) shares and the London Stock Exchange has more than 2,600 companies listed on its main market, from around 60 countries. A company can list on more than one stock exchange.
What does it mean when “stock markets are up?”
It means that the value of shares has risen over a particular time period. It is a strong indicator of economic confidence as it means there is demand from investors for company shares.
If investors want to buy shares, it means they think those shares are likely to rise in value and they will make a profit on them. For the same reason, when you hear the phrase “stock markets are down”, it means that investors have mostly been selling their shares.
Investors sell shares either because they want to cash in to invest in something else or use the money in some other way, or because they are anticipating that the shares will fall in value. Either way, this tends to be read as a loss of confidence in the company’s performance.
Lower demand for shares reduces their price.
So a fall in share prices is a reflection of a lack of confidence among investors that those companies are going to make a profit.
Stock markets are extremely sensitive to political and economics news and can react instantly in response to, say, news that house prices are rising, or that interest rates are going down, or there is going to be a General Election.
When investors respond to news events, it is because they think these events will have either a positive or negative effect on companies’ profitability, and therefore the value of the shares they hold.
Stock markets move up and down a little bit all the time, but can swing wildly in times of uncertainty, with a dramatic impact on the value of peoples’ investments.
So stock markets are both influenced by, and influence, levels of confidence in the economy.
What do stock market movements mean to you?
Even if you don’t own any stocks or shares directly, like the weather, the health of the stock market has an effect on all of us. This is because our pensions are mostly invested in the stock market. And so are our ISAs.
If you have bought into any funds, those funds are also exposed to the general ups and downs of the stock market.
Appetite from investors also determines the health of individual companies. Those businesses that list on the stock exchange are big employers. If they lose favour with investors, they might have to take actions to cut costs, which can result in falls in profit and productivity, job losses and branch closures.
On the other hand, if there is demand for their shares from investors, companies have more money to invest in things like new premises, more staff and product innovation.
You could say that confidence begins and ends with investors. And the way we know how confident they are is by looking at the stock market.
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Money Means is a news and information series written by independent financial and consumer journalists and experts. FSCS launched Money Means in 2016 to help give people clear and useful information about personal finance, to increase their understanding and confidence when dealing with money.