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Payton Layne

Professor Leonard

English 1201

21 March 2021

What Is the Stock Market and How Does It Work?

While many people have heard of the stock market, most do not actually understand how

it works. In simple terms, “the stock market refers to the collection of markets and exchanges

where regular activities of buying, selling, and issuing of shares of publicly-held companies take

place” (Chen). However, there are many questions about the stock market such as how it affects

our lives, and the way it operates.

History of the American stock market dates back to the late 1700s when the first

American stock exchange, the New York Stock Exchange (NYSE), was created in 1792. The

NYSE was founded when twenty-four merchants signed the Buttonwood Agreement to organize

secure trading in New York City. To this day, the NYSE is the world’s leading stock exchange

(Devenger). The second leading and other important exchange is the NASDAQ. It was founded

in 1971 and unlike the NYSE, NASDAQ does not have a physical location, but is instead an

online trading platform (Vox Media).

The first component to understanding the stock market is to understand what a stock is. A

stock is all of the shares in which ownership of a company is divided. When a company first

issues to sell their stock, it is called an initial public offering (IPO). An initial public offering

allows a company to raise capital from public investors buying shares of the company (Chen).

Depending on the type of stock owned, some companies may offer dividends. Dividends

are payments given back to investors based on the number of shares they own of that company
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(Napoletano). Stocks that pay out dividends are referred to as turtle stocks because they grow

slower due to the fact that they pay out dividends. Stocks that don’t pay dividends are referred to

as hare stocks because they grow quicker (Layne).

There are many different types of people that participate in the stock market. The most

common participant is an investor. Many people invest in the stock market as a way for

retirement. Other types of participants include hedgers, traders, and speculators. Each play their

own role (Chen).

The overall market can be evaluated by index funds such as the S&P 500 and the Dow

Jones Industrial Average. The S&P 500 is an index of the 500 largest publicly traded companies.

The Dow Jones is an index of 30 large blue-chip companies that was designed to represent the

health of the broader U.S. economy. The S&P 500 is preferred by more investors due to its

incorporation of more companies. Because these two indexes represent the market as a whole,

when these two indexes drastically drop, it is known as a stock market crash.

All of these stock market components are affected by recent developments in the world.

Recently, COVID-19 has caused change to the general stock market. Another recent event was

the GameStop stock saga. The GameStop stock event was a battle between common investors

and hedgers. Thousands of common investors pushed the stock price up by investing lots of

money, while big hedge funds tried betting the stock would go down, also known as short

selling. The saga sparked controversies surrounding the market as well as market regulation as

Robinhood froze GameStop’s stock on January 28th.

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Works Cited

Chen, James. “Stock Market.” Investopedia, Investopedia, 16 Sept. 2020,

www.investopedia.com/terms/s/stockmarket.asp.

Devenger, Nancy. “Stock Markets.” Salem Press Encyclopedia, 2019. EBSCOhost,

search.ebscohost.com/login.aspx?direct=true&db=ers&AN=89163986&site=eds-live.

“Explained | The Stock Market | FULL EPISODE | Netflix.” YouTube, Vox Media Studios, 17

Apr. 2020, www.youtube.com/watch?v=ZCFkWDdmXG8.

Layne, Jeff. Personal Interview. 7 March 2020.

Napoletano, E. “Investing Basics: What Are Stocks?” Forbes, Forbes Magazine, 23 Feb. 2021,

www.forbes.com/advisor/investing/what-are-stocks/.