Picture this: You’re a 16-year-old boy… wait, it gets worse! You’re hired to crew a ship on a voyage to a faraway land to trade for exotic spices and textiles and medicine. The voyage is dangerous: rough seas, foreign animals and insects, unfriendly strangers, scurvy… but what an adventure, huh?
When successful, the payoff was enormous. Sailors got paid, merchants cashed in and the expedition company sold the goods in the local market for a pretty penny. We’re talking about classic risk and reward here. If risk is high, people hope for equally high return.
So how did these journeys get funded? Trading companies like the Dutch East India Company would raise capital from the public in order to bankroll expeditions. In exchange, the investors received a stake in the company’s growth (hopefully) over time and, when possible, the company paid out dividends.
This proved to be popular because rather than investing in one particular voyage, the investor could spread their risk across many voyages. The investor was actually investing in the company (rather than the journey) and as such, owning a small piece of it — otherwise known as a share. Shares in the company became standardized and sellable from person to person.
So the blacksmith could sell her share to the butcher if she needed money and if the butcher thought it was a good deal. Buyers and sellers gathered — behold, the infant stock market! — and because shares could be bought and sold without relying on a ship to come in, they were considered “liquid.”
So, in short, you have one major company that needs a bunch of money for a project and raises it from the general public. Those public people are now tiny owners of a portion of the company’s value over time. To make it simple, the ownership pieces are standardized into shares and can be bought and sold from person to person.
It basically still works this way, but on a much, much larger scale. What’s baller now is that there is so much global trading happening and so many companies to invest in, an investor can (and should) invest in hundreds of different companies and sectors, mitigating their risk. So if one ship doesn’t return (just to stick with the simplified history metaphor), they aren’t at much risk because other ships will likely come in.
So why are prices constantly fluctuating on the market? What are those old images of people making weird hand signals on the floor of the New York Stock Exchange about? At its core, it is still just a giant group of people negotiating prices the way you might haggle for vegetables at your farmer’s market. And here’s my favorite part: Each price indicates an agreement. It’s an agreement between eager buyer and seller based on economic conditions, company information, political climate and many other factors. But isn’t it beautiful? How often do we get to witness so many agreements in real time?
If you look up a stock during trading hours, it will change frequently. This is due to new information coming to light and varying needs of investors. That’s why markets are so fascinating — they are always shifting. They’re a cross-section representation of the current knowledge and sentiment of buyers and sellers.
Even if you’re not an active investor, take a moment from your busy day to watch the values change. Find the stock price for a company, ETF or mutual fund and bask in the momentary collective agreement.
Megan Janssen is the founder of Money Juice (www.money-juice.com) and a financial advisor with Forum Financial Management, LP. The ideas and language written here are those of the author and do not necessarily reflect the views or opinions of Forum.