Imagine getting strapped into a trolley at the top of Mount Everest, and rolling down. You’ll go up a few times, but mostly you’ll be taking steep plunges down. Well, that pretty much describes the stock market around the globe these last few weeks! Trillions and trillions of dollars, yen, pounds, francs, euros, rupees have just evaporated, gone. One of the big reasons for this tumble is that many banks gave home loans to people so that they could buy a house, but many of these people could not afford to pay the loan back. Many banks around the globe lost tons and tons of money, and had to be rescued by their governments. This happend in England, Germany, France, Iceland, United States – the list goes on! The value of most stocks has been falling, and people who have invested in those stocks have been losing money. This is happening all across the world!
So what are stocks? And what does it mean when someone says that the Dow Jones is down 300 points?
Let’s say you have a company. You want to make it bigger but need more money. So you take money from a person and give them some ownership of your company. You’ve basically given that person “stock” in your company. If the company does well, both of you will make money. Now let’s say you want a lot more money and want lots of people to buy stock in your company. It’s really hard for you to get word out to everybody about your company. You can join a “supermarket” which basically has stocks of many companies. You list your company with the supermarket of stocks. Everybody who comes to buy stocks at the supermarket will also see your company’s stock there. This supermarket of stock is called a “stock exchange”. Many countries have multiple stock exchanges. You can list your company with only one stock exchange. The biggest stock exchange in the United States is the New York Stock Exchange. The biggest stock exchange in the United Kingdom is the London Stock Exchange.
Now, to tell how the financial market is doing, we use something called an “index”. Each index is basically a list of a few companies where the stocks of the companies is averaged out and followed. By tracking this index, you get the general feel for the health of the market. For example, in the United States, one of the most followed index to see how the financial market is doing is the “Dow Jones Industrial Average”. The Dow Jones is just a list of 30 huge American companies (including companies such as McDonalds and Walt Disney). If the Dow Jones goes down, usually it implies that the overall American market isn’t doing as well. Most countries have their own index that is followed. Some examples are CAC-40 (40 big companies of France), FTSE-100 (100 large companies of United Kingdom), Sensex (30 large companies of India), and Nikkei 225 (225 large companies of Japan). Most of these have fallen by 15-30% in just the last two weeks. How bad is that? If your stock could buy, for example, 10 cars two weeks ago, you can now just buy 7 or 8, no more!