Skip to main content

How the Stock Market Works

Many people don’t fully grasp how the stock market works and what its economic function actually is.  Behind all the complicated maths and (deliberate and unhelpful) mystique is a very simple economic function.  Entrepreneurs need capital to operate their businesses and individuals need outlets for savings.  Individuals can give entrepreneurs money in return for a SHARE of the company’s future profits or a STOCK of the company’s capital.  An individual can, at any time, sell this right to a share in the company’s future profits to another individual – this market, which can be organised or informal, is known as the share market or stock market.  Below is a great cartoon from the 1950s, unearthed by Graeme Acheson, which provides a helpful (if dated) explanation of how the stock market works.


Popular posts from this blog

The Failure of Herstatt Bank

As an undergraduate, I was taught about the failure of Herstatt Bank in 1974 and Herstatt risk. This bank was only the 35th largest bank in Germany at the time so why would anyone be interested in studying its failure? Herstatt failed because of its involvement in risky foreign exchange business. When it closed its doors on 26 June 1974, counterparty banks (mainly in New York) had not received dollars due to them because of time-zone differences - this is known as settlement risk. The cross-jurisdictional implications of its failure resulted in the Bank for International Settlements setting up the Basel Committee on Banking Supervision and Herstatt's failure was a key reason for the establishment of real-time gross settlements systems, which ensures that payments between two banks are executed in real time. The Bank of England's Ben Norman has an interesting post on Herstatt over at the Bank's new blog ( Bank Underground ). As well as giving an excellent overview of

Boom and Bust: A Global History of Financial Bubbles

Boom and Bust: A Global History of Financial Bubbles, co-authored with my colleague Will Quinn , is forthcoming in August. It is published by Cambridge University Press and is available for pre-order at Amazon , Barnes and Noble , Waterstones and Cambridge University Press . 

The Great Depression

Marginal Revolution University has a great video on the Great Depression.