The Stock Market – What Exactly Is It Measuring?
Listening, hearing, and watching the news about the stock market morning, day, and night you can’t help but wonder why do we have to hear all this? Why is the Stock Market so important? What is the Stock Market doing? Well, there is a general perception that when the Stock Market is booming the economy is booming. And in America, the stock market has been mostly booming for almost 40 years! But if we add up all the goods and services bought and sold in the US, the actual economy isn’t growing as quickly as it used to. Wages have hardly budged in decades. The average American family’s net worth still hasn’t recovered since the Great Recession.
So what exactly is the Stock Market measuring?
For many years this stock market has been the barometer of America’s prosperity. But many feel that this is fundamentally a psychopathic philosophy. A philosophy that won’t be good in the long run. So, what is the stock market? The stock market can be viewed as people buying and selling tiny pieces of companies, based on how much they think those pieces will be worth in the future.
There are stock markets all over the world. But the New York Stock Exchange is the Big Kahuna! It’s been around since 1792 when 24 stockbrokers started this under a tree on Wall Street. Today, it’s where shares in big traditional companies like IBM and many more are traded.
The NASDAQ is the cooler younger brother. It was born in 1971 and doesn’t have a physical location. Well, then how does trading take place? It takes place electronically. This is where one can find tech companies like Apple and Facebook. So, in America, if you want to know how the stock market is doing, you want to know how both these exchanges are doing. This is where the concept of indexes is used.
Indexes take a whole bunch of share prices and transform them into one clean number, easier to understand. The Dow and S&P are big American indexes, but other countries have their own indexes to measure their stock markets. Today, most of the world’s biggest companies are publicly traded, but this wasn’t always the case.
Usually, big guys – Andrew Carnegie, John D. Rockefeller, used to control all the negotiations in the market. But this all began to change at the beginning of the 20th century. We start to see the rise of companies like General Motors and General Electric and RCA. More and more companies entered the ring. Companies discovered that if you allow the public to buy shares, they could grow a lot faster. Thus, the stock market can be considered as a force for good. It drives companies to make good decisions so that they have more money to give back to shareholders and more money to grow and create jobs. Now, this is good for everybody.
As the American public corporations started growing there was a sense of growing prosperity. In the decades after WWII, the stock market helped create the heydey of shared American prosperity.
But this all also had the downside. The downside is turning to wrong methods to bump up the share price. Because corporations were owned by their shareholders, the only obligation of business was to make profits. The salary of the CEO is dependent on what the share price will be a year down the line. Hence, the CEO’s do what they think will increase the share price, irrespective of the long-term consequences for customers, to society, to the environment, or even to the corporation in the long-term.
So to conclude, the increase in the overall valuation of the stock market does not indicate the improvement in the lifestyle of an average American. But one thing that can be said for sure is – as the stock markets have grown, so have the CEO’s paychecks. In 1973, the average CEO made about 22 times more than the average worker.
By 2016, this gap increased to 271 times more!!!!!!
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