How does the stock market work?

00:06 In the 1600s, the Dutch East India Company employed hundreds of ships to trade gold, porcelain, spices, and silks around the globe.

00:16 But running this massive operation wasn’t cheap.

00:19 In order to fund their expensive voyages, the company turned to private citizens–individuals who could invest money to support the trip in exchange for a share of the ship’s profits.

00:30 This practice allowed the company to afford even grander voyages, increasing profits for both themselves and their savvy investors.

00:39 Selling these shares in coffee houses and shipping ports across the continent, the Dutch East India Company unknowingly invented the world’s first stock market.

00:50 Since then, companies have been collecting funds from willing investors to support all kinds of businesses.

00:56 And today, the stock market has schools, careers, and even whole television channels dedicated to understanding it.

01:04 But the modern stock market is significantly more complicated than its original incarnation.

01:09 So how do companies and investors use the market today?

01:14 Let’s imagine a new coffee company that decides to launch on the market.

01:18 First, the company will advertise itself to big investors.

01:22 If they think the company is a good idea, they get the first crack at investing, and then sponsor the company’s initial public offering, or IPO.

01:31 This launches the company onto the official public market, where any company or individual who believes the business could be profitable might buy a stock.

01:39 Buying stocks makes those investors partial owners in the business.

01:44 Their investment helps the company to grow, and as it becomes more successful, more buyers may see potential and start buying stocks.

01:51 As demand for those stocks increases, so does their price, increasing the cost for prospective buyers, and raising the value of the company’s stocks people already own.

02:01 For the company, this increased interest helps fund new initiatives and also boosts its overall market value by showing how many people are willing to invest in their idea.

02:13 However, if for some reason a company starts to seem less profitable the reverse can also happen.

02:19 If investors think their stock value is going to decline, they’ll sell their stocks with the hopes of making a profit before the company loses more value.

02:27 As stocks are sold and demand for the stock goes down, the stock price falls, and with it, the company’s market value.

02:34 This can leave investors with big losses–unless the company starts to look profitable again.

02:40 This see-saw of supply and demand is influenced by many factors.

02:45 Companies are under the unavoidable influence of market forces–such as the fluctuating price of materials, changes in production technology, and the shifting costs of labor.

02:56 Investors may be worried about changes in leadership, bad publicity, or larger factors like new laws and trade policies.

03:03 And of course, plenty of investors are simply ready to sell valuable stocks and pursue personal interests.

03:09 All these variables cause day-to-day noise in the market, which can make companies appear more or less successful.

03:16 And in the stock market, appearing to lose value often leads to losing investors, and in turn, losing actual value.

03:23 Human confidence in the market has the power to trigger everything from economic booms to financial crises.

03:30 And this difficult-to-track variable is why most professionals promote reliable long term investing over trying to make quick cash.

03:38 However, experts are constantly building tools in efforts to increase their chances of success in this highly unpredictable system.

03:45 But the stock market is not just for the rich and powerful.

03:49 With the dawn of the Internet, everyday investors can buy stocks in many of the exact same ways a large investor would.

03:56 And as more people educate themselves about this complex system they too can trade stocks, support the businesses they believe in and pursue their financial goals.

04:05 The first step is getting invested.