S2E5 - What is the "market?"
Q: What is the "market?" (1:30)
A: Generally speaking, when we talk about the market in general terms, we're talking about the stock exchange and the ability to buy and sell pieces of a company or pieces of a loan to a company. The stock market allows me to own a fraction of a percent of the company and participate in its profits.
Now, there are lots of different things that we call the market I can own equity in that [company or] that stock, it's no different than going into a business partnership with your friend...other than it's regulated. Now that's one reference to the markets.
Another reference to the markets, and this is what you hear on TV a lot when they say, the market was up 5%, or the market was down 5%. What they are referring to is usually a basket of companies.
There's a company called standards and poor, and they've been around for over a hundred years. And what they do is they compile lists of companies and group them together. And so one of the most common ones is what's called S & P 500.
The S&P 500: is the top 500 companies in the United States. And when [the price for those companies] move, when people are buying and selling them, and willing to pay a higher price for them, then the market overall moves, and it can be an indication of how the overall stock market is behaving.
So when we talk about the market, we're referring to lots of different things, but in general, what we're referring to is the fact that you can own pieces of this company, of these companies kind of move together.
Q: So is the S&P 500, aka the "market" like a barometer of our stock financial health? Or of the country's financial health?
A: So in the United States, the S&P 500 is the top 500 companies, but there are thousands and thousands of companies in the United States.
And when we look at the S&P 500 itself, there are times, such as now, where that list is dominated by just a few names, you know, Over the last few years, you may have heard the term FANG, which stands for, Facebook, Amazon, Netflix, and Google.
These companies make up the vast majority of the S&P 500's networth. They're not the bulk of the United States economy, right? Not by a wide margin. They, they are significant. They have lots of money, but when you look at the S&P 500, what you're really talking about is these tech companies. You're not talking about the mom-and-pop shop, that's selling, bagels and danishes around the corner. You're not talking about the pizzeria. They are too small even to be noticed, and what affects Microsoft doesn't really affect them. So it's, it's an indication of the overall health...but it can easily be distorted by these large companies.
So it's important not to equate economic our economic health with market success. Right? What happens in the market is not related to what happens in the economy.
Q: So is that what causes stock prices to go up and down?
A: Stock prices go up when people's expectation of the future is rosy. And everyone's like, oh, the world is great, and everything's gonna be good. And then what happens...some news comes out, or something comes out that makes people reconsider reality. And all of a sudden, people get pessimistic. It's not like they go like, oh, okay, well, you know, I'll readjust my expectations a little bit.
They usually swing wildly. They're a little bipolar.
When people are optimistic about the future, the price goes up.
When people are pessimistic about the future, the price goes down.
What people are trying to do is price out what the future will be.
Now, what also happens is you have institutional investors like the New York state fire department association, the police unions, etc.... And they've got billions of dollars that they have to invest for their pensions. And when they're investing billions of dollars, they have to follow strict rules. And in following those strict rules, sometimes what will happen is the market will go down because people get overly pessimistic about something and it, it could be completely unfounded, but it's enough that people are willing to sell at really low prices. And by doing that, they devalued the company enough that it triggers these institutional investment rules. And all of a sudden these major institutional investors. And I think it's worth pointing out that the vast majority of money in the stock market is from institutional investors. (ie. local governments, pensions unions, etc...)
In fact, billions, and billions of dollars, trillions of dollars are being controlled by essentially committees that have to follow rules, very strict rules. And. When, these selloffs happen, their rules get triggered, and they have to move their money.
So they have to either move to something that is less risky, or they have to move into something that's more opportunistic, whatever the rules say they have to do and that can further a sell off.
]And so people kind of learned what the rules were of these institutions, and they were able to manage around it. And you can develop your own set of rules as a regular investor that profited off of those institutional rules.