STOCK MARKET

Like a grocery market, a stock market is a place specifically designed to facilitate the purchase and sale of certain goods. Instead of selling food and supplies like a grocery, the stock market provides a venue for trade in companies, ventures, and other investments through the buying and selling of stocks, bonds, mutual funds, limited partnerships, and other securities. There are several regional stock exchanges throughout the United States, but the U.S. stock market is dominated by two exchanges: the New York Stock Exchange (NYSE) and the National Association of Dealers Automated Quotation (system), better known as NASDAQAmex. In 1996 investors could buy and sell the shares of about 3000 companies on the NYSE and some 5400 companies on the NASDAQ-Amex.

The NYSE was the first stock exchange established in the United States. It began operations on the island of Manhattan in New York, in 1792. The American Stock Exchange (Amex) started trading in the 1850s. At first the number of companies investors could buy shares in was quite small, but as the U.S. economy exploded in the nineteenth century, businesses found it harder to fund ambitious new undertakings, like railroad construction, by relying only on their own resources or loans from banks. To raise the needed capital, companies turned to the stock market, where they sold stock (shares of which represents part ownership in the company) to the public.

While individuals may invest in the stock market for a variety reasons, one of the primary motivators is to make a higher return on their money than may be available through a traditional, conservative bank savings account. The stock market, however, has more risk attached to it than does money in the bank. For instance, if a new telecommunications company offers its stock for sale on the market and performance outlooks for this company are promising, investors may rush to buy the stock, its value will go up, and the company will raise lots of capital. If, however, by the end of the year, the company has posted poor earnings and the performance outlook has turned sour, the same investors who rushed to buy stock in the company may now rush to sell, causing the value of the stock to drop.

The stock market entered the daily lives of millions of Americans during the 1920s, when economic growth and the desire to strike it rich quick drove stock prices to an all-time high in August 1929. Stock prices, however, were not in line with companies' actual earnings, and many people bought shares only through heavy borrowing, so at the first signs of uncertainty in the market in September 1929, the market collapsed, hitting rock bottom in July 1932. In the 1930s, the government took steps to reform the stock market and established the Securities and Exchange Commission to regulate stock trading. The 1950s and 1960s were periods of great growth in the number of companies selling shares on the stock market and in the number of investors buying stocks. In 1971 the NASDAQ was formed to provide a stock market for "over-the-counter" stocks, i.e., stocks not listed on the regular stock exchanges. One of the greatest bull markets in stock market history began in 1982, and 16 years later the NASDAQ and Amex merged to compete more effectively with the NYSE.