How The Stock Exchange Works (For Dummies)

What is the Stock Exchange and how does it work? The Stock Exchange is nothing more than a giant globally network tend to organize the market place where every day huge sums of money are moved back and forth. In total over sixty trillion (60,000,000,000,000) Euros a year are traded. More than the value of all goods and services of the entire world economy. However it's not apples or second hand toothbrushes that are traded on this marketplace. But predominantly securities. Securities are rights to assets, mostly in the form of shares. A share stands for a share in a company. But why are shares traded at all? Well, first and foremost the value of a share relates to the company behind it. If you think the value of a company in terms of a pizza. The bigger the overal size of the pizza, the bigger every piece is. If for example Facebook is able to greatly increase its profits with a new buisness model. The size of the companies pizza will also increase, and as a result so will the value of its shares. This is of course great for the share holders. A share which perhaps used to be worth 38 euros could now be worth a whole 50 euros. When it's sold this represents a profit of twelve euro per share! But what does Facebook gain from this? The company can raise funds by selling the shares and invest or expand it's buisness. Facebook, for example, has earned sixteen billion dollars from it's listing on the Stock Exchange. The trading of shares though, is frequently a game of chance. No one can say which company will preform well and which will not. If a company has a good reputation, investors will back it. A company with a poor reputation or poor performance will have difficulty selling its shares. Unlike a normal market in which goods can be touched and taken home on the Stock Exchange only virtual goods are available. They apear in the form of share prices and tables on monitors. Such shareprices can rise or fall within seconds. Shareholders therefore have to act quickly in order not to miss an opportunity. Even a simple rumor can result in the demand for a share falling fast regardless of the real value of the company. Of course the opposite is also possible. If a particularly large number of people buy weak shares. Because if they see for example great potential behind an idea. Their value will rise as a result. In particular young companies can benefit from this. Even though their sales might be falling, they can generate cash by placing their shares. In the best case scenario this will result in their idea being turned into reality. In the worst case scenario, this will result in a speculative bubble with nothing more than hot air. And as the case with bubbles, at some point, they will burst. The value of Germany's biggest thirty companies is summarized in what is known as the DAX share index. The DAX shows how well or poorly these major companies and there by the economy as a whole are performing at the present time. Stock Exchange is in other countries also have there own indices. And all of these markets together create a globally networked marketplace. Subtitles by the Amara.org community

Channel: Kurzgesagt – In a Nutshell

Views: 7,503,092

Rating: 4.916585 out of 5

Keywords: Stock market, wallstreet, stock exchange, market, Trading, money, crisis, stocks, buisness, finance, explained, Economy, kurzgesagt, science, dummies, funny, crash, taco, animation, motion graphics, flat design

Id: F3QpgXBtDeo

Length: 3min 34sec (214 seconds)

Published: Thu Nov 28 2013

Reddit Comments

[u/keithb]

Huh. So this video explains almost nothing about how the markets work, but only what they are for.

It also muddles up a rise in the price of a security being a sign that the security is in higher demand with a fall in the price being a sign that it is not in demand. A security with no demand won't be traded and its price won't change. Prices only change (up or down) when trading happens.

[u/poddus]

could someone explain to me how stock prices are set, down to a few milliseconds? not the various parameters which can influence stock price, but who determines the price on the ticker and how do they arrive at that figure in a virtually continuous fashion? does each seller set their own price independently, the stock price being an aggregate, or is there a central body that determines the stock price?

[u/ZamCaladad]

I think this video works well as a beginner's baseline from which to move on.

[u/Tiervexx]

Whenever someone posts about the stock exchange I cringe because so much of what is said is from clueless people who are just raging against people with more money than them.

This however was a good summary of how it actually works.

[u/Khaloc]

This does basically explain how the stock exchange works.

Some commenters say that you get a lot of far left people commenting how they are all "theives" and yes, while most investors (aka, normal folk investing in mutual funds and bonds) are not thieves (they gain money from their capital only) there still exists fund managers and actively managed funds that exploit investors and put money only in their own pockets.

This is usually found in the expense ratio. An actively managed fund with a high expense ratio benefits, more often than not, the fund manager, not the investor.

Most of the times a passive index fund with a low expense ratio will be the best option for a private investor.

Edit: spelling

[u/[deleted]]

Magiiicccc!!!

[u/Sephian]

This video does not explain one of the biggest aspects of the stock market: the price. Prices are set by buying & selling by buyers & sellers. Not some magical number that is determined by company performance. I mean, they're related, buy saying that "the stock price goes up if the company does a good thing" does not explain at all the mechanism that causes the price to change. This is a bad video.