Intro to Stock Markets

♪ [music] ♪ [Alex] Let’s continue our discussion
of financial intermediaries by looking at stock markets. Stocks are shares of ownership
in a corporation, and they’re traded
in organized markets called stock exchanges. Let’s go back to the example
we’ve used before, Starbucks. A member of the public could first
buy shares of Starbucks in 1992, after it completed
its Initial Public Offering, or IPO, otherwise known as going public. If you own Starbucks shares, you’re a part owner
of the Starbucks corporation, and you’re entitled to a share
of the firm’s profits. Sometimes you receive this profit
directly through a dividend payment. Profits can also be reinvested
in the business to grow it, hopefully increasing
the value of your shares if you ever decide to sell. It’s important to note
that when we think about turning savings into investment
through buying stocks, it’s not the typical
buying and selling of existing shares of stock
that we’re thinking of. That just transfers ownership
from one shareholder to another. It doesn’t mean
that Starbucks actually has additional money to invest. It’s when new shares of stock
are issued and sold that savings are turned
into investment. That happens at the IPO,
the Initial Public Offering, or when firms decide
to issue new shares of stock, often as part of a plan
to raise money to invest in significant
new business ventures. The existence of stock markets
is a key institution for encouraging entrepreneurship. Selling shares directly raises money
to fund big ideas — that’s clear. But less obviously,
IPOs provide a big payoff for founders and venture capitalists
who invested their time and money when the firm was just
a risky startup. Once a company goes public, founders and initial investors
can sell some of their ownership in order to diversify
their own holdings. Here’s an important difference
between banks and stock markets. When you purchase a stock,
you’re essentially making a bet on the success of that company. So when it comes
to the stock market, some savers will wind up happy and others will wind up
a little bit sad. So the stock market can be
a riskier method of investment than investing through banks. Bank savers typically do not have
to deal with risky ups and downs in the value of their deposits. Next up, we’re going to look
at another type of financial intermediary —
the bond market. But before you go, let us know
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on our feedback site. Thanks! [Narrator] If you want
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