Mad About Science: Stock exchange

By Brenden Bobby
Reader Columnist

“The economy” is a term that gets thrown around a lot in the political arena, as well as public Facebook arguments, but what exactly does “The economy” entail? Our economy is a vast and complicated network of myriad businesses that makes things to be used, consumed or built upon later (a term you will often hear referring to this is “creating value”). Covering in vivid detail what exactly the U.S. economy is would create a staggering tome that would far surpass my few-hundred word limit. Instead, we are going to look at how stocks play into and represent our economy in a tangible way.

What are stocks, and what is the stock market?

A stock is a portion of a company. This portion represents a percentage of ownership of the company, which grants the owner of the stock a number of perks, ranging from a portion of the company’s profits to voting rights when it comes time to name a new chief executive or member on the board of directors. Unlike voting for a publicly elected official, every vote is not equal. The weight of your vote in the company depends on how much stock you hold. If you own a single stock out of a million, your vote counts as 0.0001% in favor of whatever it is you’re voting on. If a single person or business entity holds 500,000 shares of the business, their single vote will massively overwhelm yours.

While that seems disheartening, you still get to reap the rewards of a business that’s performing well by simply owning the stocks, regardless of the weight of your vote. Each share is a representation of a percentage of the company, so as the company’s value increases, so does the value of your share. If the company is worth $1,000 and you own 1% of the company’s shares, you have $10 in stock. Should the company perform well, or a major trade happens and the company’s value rises to $2,000, you still own 1% of the company, and you now have $20 for doing nothing.

Conversely, if the company fails or goes bankrupt, the value of the shares will fall, and you could lose most — if not all — of that money you had invested.

Interestingly, the shares you buy of a company don’t actually come from the company you’re buying. All businesses don’t start out being publicly traded. Some never need external investment to reach their goals and are able to generate their own finance internally. Others, such as Facebook or Amazon, grew very quickly and needed an injection of funds to facilitate their ability to hire more employees, purchase or lease property, and maintain nationwide distribution. A company’s owner may not sell off their entire stake in the company, but sell enough shares to other investors to facilitate their financial needs while remaining in control of their business.

Any time you buy or sell stocks on a stock exchange, you’re buying and selling from/to other people, and never the company whose stocks you’re trading.

The price of a company’s shares will rise and fall for innumerable reasons — there is no clear cut science that will predict the trajectory of a stock’s value, or the exchange system wouldn’t function at all. It’s essentially a form of legitimized gambling, and that uncertainty is precisely what injects value into it.

Throughout the years, people have generally let stock management firms handle their investments for a fee. This makes sense if you want to make money but also want the convenience of not having to chase stock prices in the event that you have a career or responsibilities of your own. In recent years, with the immersion of big data and constant internet connectivity, independent investing has seen a rise in popularity. People who never would’ve been able to invest in the stock exchange 10 years ago are making waves in the markets today.

You may have seen Reddit users making headlines this week as the subreddit r/wallstreetbets has almost single-handedly driven the price of Gamestop from $17.25 a share to more than $150 per share at one point over the course of a little under a month, despite the fact that Gamestop has been falling in value for the past five years. This was achieved by a few investors grabbing a large number of shares while the value was low — so low that this move was viewed initially as an absurdist joke, a factor that helped push the topic’s visibility on Reddit’s front page, garner attention and inspire others to start buying stocks in the company. This spike in demand whipped into an investor’s feeding frenzy in the past week as the stock’s price skyrocketed. The value jumped again when the subject was tweeted by Tesla and SpaceX titan, Elon Musk.

This type of trading has been referred to in media outlets as “short selling,” and is a way for an independent trader to make a risky bet with potentially huge payoffs. Essentially, an investor that wants to “short” will borrow shares from a broker and sell them for some initial capital, anticipating the stock will fall in value over the next few days. If it does, they snatch up the stock for less than they had sold it for before, then wait for it to rise. It’s a risky tactic — if your bet fails, you not only lose your investment but you’re in debt to the broker. If it succeeds, well… I hope you enjoy your new yacht!

Stay curious, 7B.