What are Stocks, Commodities
Source: U.S. Department of State
Stock Market Basics
Capital markets in the United States provide the lifeblood of capitalism.
Companies turn to them to raise funds needed to finance the building of
factories, office buildings, airplanes, trains, ships, telephone lines, and
other assets; to conduct research and development; and to support a host of
other essential corporate activities. Much of the money comes from such major
institutions as pension funds, insurance companies, banks, foundations, and
colleges and universities. Increasingly, it comes from individuals as well. As
noted in chapter 3, more than 40 percent of U.S. families owned common stock in
Very few investors would be willing to buy shares in a company unless they
knew they could sell them later if they needed the funds for some other purpose.
The stock market and other capital markets allow investors to buy and sell
The markets play several other roles in the American economy as well. They
are a source of income for investors. When stocks or other financial assets rise
in value, investors become wealthier; often they spend some of this additional
wealth, bolstering sales and promoting economic growth. Moreover, because
investors buy and sell shares daily on the basis of their expectations for how
profitable companies will be in the future, stock prices provide instant
feedback to corporate executives about how investors judge their performance.
Stock values reflect investor reactions to government policy as well. If the
government adopts policies that investors believe will hurt the economy and
company profits, the market declines; if investors believe policies will help
the economy, the market rises. Critics have sometimes suggested that American
investors focus too much on short-term profits; often, these analysts say,
companies or policy-makers are discouraged from taking steps that will prove
beneficial in the long run because they may require short-term adjustments that
will depress stock prices. Because the market reflects the sum of millions of
decisions by millions of investors, there is no good way to test this theory.
In any event, Americans pride themselves on the efficiency of their stock
market and other capital markets, which enable vast numbers of sellers and
buyers to engage in millions of transactions each day. These markets owe their
success in part to computers, but they also depend on tradition and trust -- the
trust of one broker for another, and the trust of both in the good faith of the
customers they represent to deliver securities after a sale or to pay for
purchases. Occasionally, this trust is abused. But during the last half century,
the federal government has played an increasingly important role in ensuring
honest and equitable dealing. As a result, markets have thrived as continuing
sources of investment funds that keep the economy growing and as devices for
letting many Americans share in the nation's wealth.
To work effectively, markets require the free flow of information. Without
it, investors cannot keep abreast of developments or gauge, to the best of their
ability, the true value of stocks. Numerous sources of information enable
investors to follow the fortunes of the market daily, hourly, or even
minute-by-minute. Companies are required by law to issue quarterly earnings
reports, more elaborate annual reports, and proxy statements to tell
stockholders how they are doing. In addition, investors can read the market
pages of daily newspapers to find out the price at which particular stocks were
traded during the previous trading session. They can review a variety of indexes
that measure the overall pace of market activity; the most notable of these is
the Dow Jones Industrial Average (DJIA), which tracks 30 prominent stocks.
Investors also can turn to magazines and newsletters devoted to analyzing
particular stocks and markets. Certain cable television programs provide a
constant flow of news about movements in stock prices. And now, investors can
use the Internet to get up-to-the-minute information about individual stocks and
even to arrange stock transactions.