Basic Economics: the Stock Market

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• Part 2: The Stock Market

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Basic Economics: Want vs. Need
• Basic Economics: Supply and Demand
Basic Economics: Scarcity and Choices
Basic Economics: Interdependence
Basic Economics: Inflation

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Part 1: Stock in General

The stock market has been in the news a lot lately. Your older family members are probably talking about it more than usual, or you might know someone who talks about it. But what is this mysterious "stock market"? Is it a place that sells stock? Well, sort of.

First of all, let's look at what stock is. Stock is an investment that people pay to a company because they believe that that company will make money. It's kind of like a loan, except that payback isn't guaranteed. A bunch of people give a company money, and in return those people (called investors) get a certain amount of shares of stock. The company sells these shares of stock at a certain price; and the more money you pay, the more shares you can buy.

For example, if the price of Disney stock is $10, then you can get 3 shares for $30. When you write Disney a check for $30, they give you 3 shares of stock.

What can you do with it? Most people who buy shares of stock want to sell them for more than they bought them for, so they hold onto them. If the share price goes up to $15, then you can sell your 3 shares of stock and make $15, since you spent $30 originally and you got $45 back.

You might think, however, that Disney is a good company that makes good products and that they might make even more money later on. You could hold onto your stock and hope that the share price goes even higher. Usually, the more money a company makes, the higher its stock price goes. You might decide that you're going to sell only if the share price reaches $30. In that case, you watch the share price until it reaches the $30 level, then sell. What do you make? Well, you get $90, so you make a profit of $60 (since you spent $30 to buy the stock in the first place).

Next page > The Stock Market > Page 1, 2

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