Well, it’s been a little while since my first post. I’ve been doing my financial research whenever I’m not going to classes, doing assigned readings, writing papers and studying for exams. I’m finding the workload at the university level to be far greater and much more intense than it was in previous years. However, I intend not to use this fact as an excuse to avoid this blog. I’ve set a goal and I intend to reach it. So here goes.
My main interest, as stated before, is in forex trading but I feel it’s necessary to start with basics and work my way up to more specialized forms of trading. I just finished reading about the US stock market. Though I’m not based in the States I’m fascinated by that country’s financial markets and history. So, I ask myself, “What is it?” and “How did it start?”
History of Wall Street
It’s important to know that the phrase “Wall Street” isn’t solely reserved to denote the famous lower Manhattan district. It can also mean the entire United States stock market. In the early 1800s, 24 stockbrokers came together and decided to make the Buttonwood Agreement. This group of supply brokers and store owners signed the agreement underneath a buttonwood tree located at 68 Wall Street. Later on, the group would rename itself as the NYSE or New York Stock Exchange, which unbeknownst at the time would be the future center of the country’s economy.
The stock market of the United States has been around for almost 200 years, but only a fraction of the world’s population knows what the US stock market is and how it operates, myself included.
Supply and demand are the two underlying cogs that drive any financial market across the globe. If there is investor demand for a stock, price increases hence creating profits for existing investors. If a stock goes down, short sellers or bear investors make money off the value depreciation.
Common vs Preferred Stock
There are two key types of stock transacted in the US stock market – common and preferred. The former is the more commonly traded type and provides investors with the best potential for ROI. If you purchase shares of a common stock, you own a fraction of the business. When the company is in profit, people tend to buy more shares of it thus effectively driving the stock’s value up.
Preferred stock, on the other hand, has some unique characteristics. For instance, in the event that a company declares bankruptcy, investors of preferred stock are the first to be paid back their investments. Moreover, preferred stocks typically generate higher dividend yields. The trade-off is that preferred stocks tend to move nominally over a given period of time.
Stock market indices are used as a way to measure the value of segments of the stock market. Because of its sheer size, it makes sense to divide the assets encompassed by the market and then individually compute for their values. Computations are made using the prices of chosen stocks. The three largest stock indices in the U.S. include Nasdaq Composite, Dow Jones Industrial Average, and the Standard & Poor 500.
Keep in mind that a stock market index like Dow Jones Industrial Average is non-tradable. Instead, it stands as an arithmetical construct that can be tracked. In fact, many mutual funds and ETFs attempt to do just that. There are indices in other countries, such as the London FTSE 100 Index and Japan’s Nikkei 225 Index.
I know this entry reads more like an encyclopedia article than it does a blog but it’s what I learned recently. I have a Calculus test tomorrow so I’m off until next time.