I get it. The stock market is a very abstract concept. I remember when I first got licensed as a stockbroker and I had to explain it to a 10-year-old. It was humbling because it made me question what I was doing as a profession briefly but, more importantly, it confirmed that I understood what I was doing because I was able to find the words to explain. When you fully grasp how much support is behind the stock market I think it’ll earn your trust. There is a legitimate concern which can be cleared up by increasing your knowledge and experience with the markets. Additionally there are historical and empirical reasons that have conditioned us to distrust, but when you assess the entire landscape of investing, it makes sense to put your money in the stock market.
If you struggle to understand what really goes on in the stock market, consider it a way of showing your faith in something. Most people have some type of hobby, sports team, or belief system that they support. Whether its buying trading cards, collecting cars, sports memorabilia, fashion, shoes, books, toys, music, live performances, experiences—something. There is something you put your faith in; sometimes it’s a physical item and sometimes its not. Owning a share of a company is an additional way to own part of that "magic". But you have to realize that the value of that share is based upon how other people view that so-called magic.
Owning company stock is about hope, faith, and performance. The hope that a company will continue to produce magic; and faith that it will do MORE in the future. If you like Nike shoes, or Jordan products you could own shares of Nike (ticker symbol is NKE). If you frequent the Cheesecake Factory you could own shares of CAKE. If you own any product with a processing chip like a computer or tablet, you might decide to buy Nvidia (NVDA). You get the picture. The stock market provides access to ownership of those publicly traded companies. It allows you to transition from being simply a consumer to being an owner on your terms, as long as you can purchase a share. Stocks symbolize ownership of a company and even though it’s hard to feel it physically, the impact is very real. Stocks trade on an exchange daily. Think of it as a shopping mall for example, where each vendor or store pays a fee to the owner of the mall to set up shop and sell their goods to consumers. You as the investor, can only get the stock directly through the exchange. The only difference is, due to laws and licensing, a broker/dealer has to do the transaction for you. In short, in order to deal with the exchange you have to go through a broker (Fidelity, Schwab, E*Trade, Robinhood, Webull are all broker/dealers).
Even though there were precursors and resembling traces of a stock market in Venice (1300’s), Belgium (1500’s), the East Indies(1600’s); The first stock market began in Amsterdam in 1611 and the first US Stock exchange was founded in Philadelphia in 1790. In Africa, the first exchange was founded in Johannesburg South Africa followed by dozens of other exchanges throughout the continent. As a whole, there are sixty stock exchanges in the world with thousands of stocks publicly traded on those exchanges (approximately 600,000 companies). They each had one thing in common: merchants furthering their business by issuing and trading a portion of their business. There needed to be ups, downs, trials, and errors, followed by regulation to bring us to the stock market environment we see and know every day. The New York Stock exchange is currently the biggest stock exchange in the world were 2.4 billion shares exchange hands each day.
Companies that are publicly traded on a stock exchange issue millions of shares of stock at a specific price and once the shares are issued, it’s up to individual investors to determine the price through their buying and selling of the stock. The quickest way for the owners of those companies to build wealth with stock is to pay themselves in stock. We all know that a salary of cash is a fixed amount but if you pay yourself in stock, the stock has a potential to go up and down. The largest owners of company stocks are business owners who decide that they don’t want to keep their wealth in cash. They have built the tolerance of seeing their wealth fluctuate up and down, with the idea that in the long run it will be up. Overall, they know that in order to maintain wealth they need to own something that constantly changes in value. Cash changes in value but not enough for a business owner.
The New York Stock Exchange over the years has become more efficient transitioning from an all-human model to morse code, to a hybrid computer and human model creates a mostly automated process. When you see the traders on the floor on the exchange, those are merely floor brokers and market makers who have a regulatory obligation to maintain fair and orderly markets for their assigned securities (investments). The hybrid model reduces volatility, creates smaller gaps in price differences (tight spreads) and deeper liquidity (the ability to find a buyer or seller for your trade). In short, it took decades and significant technology to create a safe and regulated market where you can buy and sell shares accurately and within fractions of a second.
Suppose I bought stock and never told anyone. How do they keep track of all this?
I love this one. So when you buy shares there is a registrar for every single publicly traded stock. The registrar’s job is to verify who owns the stock, how many shares, and keep track of shareholder data based on current buy and sell transactions. Nowadays most shares are held in book entry meaning each owner has a number of shares owned next to them on the registrar’s sheet. For example, if you buy ten shares of Tesla today in your Fidelity account, the registrar for Tesla will show on their database that the amount of Tesla shares held at Fidelity is +10 because includes the amount of shares you purchased. Brokerage firms like Fidelity, Schwab, TD Ameritrade, and others operate as custodians that hold on to the shares for you and are obligated to report and confirm their holdings. If they don’t provide you with a statement showing you the correct amount of shares, you are going to be upset. If they hold the wrong amount of shares, there would be a conflict with the registrar. Transfer agents like Computershare also play a role in keeping records of certificates (yes there are still physical stock certificates laying around) and move shares between custodians.
In summary, brokers, custodians, registrars, and transfer agents all play a role making sure that no one forgets that you own shares. If for some reason you didn’t keep your information current at your broker for several years and never told anyone about the purchase of your stock, it would eventually go into escheatment with your particular state where someone connected to you, or your estate would have to prove they are eligible to receive it.
What about historical patterns like in the past like redlining, gentrification, and discrimination?
In the 1930’s the Federal Housing Administration (FHA), furthered segregation by refusing to insure mortgages in and near African-American neighborhoods. Additionally the FHA would subsidize builders who mass produced entire subdivisions for whites with the requirement that the homes are not sold to African Americans. Its maddening that these were laws on paper but right now the ability to invest in stocks still remains as an opportunity to own.
Owning stocks an opportunity to own shares of those companies who were builders, own real estate investment trusts, own land and construction companies own the stocks of basic materials companies and the like. Own shares of the banks that were part of the lending process. I admit there is going to be some level of discomfort, but history has shown us that there is power in ownership and waiting for policy to lean in your favor doesn’t get faster. The barriers to owning stock are significantly lower than that of buying homes and real estate property. Even with a perfect credit score and the more favored skin color, it would take about 30 days to buy the home of your choosing or sooner if you are paying in cash. When it comes to stocks within about 20 minutes, you would be able to open an account deposit funds and buy stocks, mutual funds and investments directly linked to the real estate industry.
Do enough people own stocks to keep the market up?
An investment is only as good as the price people are willing to pay for it. In the US according to a study by Gallup, 65% of households own stocks whether its individually, jointly, in a mutual fund or retirement account like a 401k or IRA, which is a lot of people. Owning stocks is still considered a luxury and cannot be taken for granted. The wealthiest people in the world own stocks, businesses, property, art, and other items that can be traded or sold. The point is, yes, enough people own stock and the number of people will continue to grow as long as technology continues to advance and make it easier. As long as employers continue to provide stock to loyal employees, or employees contribute to their 401k plans.
Let’s put things in perspective. According to CNBC, in 2021, 10 percent of Americans own 89% of all US stocks held by households. The stock market plays a big role in the wealth disparity and inequality of the US so if you are not involved, you are being left behind. The top 1% of the American population gained over $6.5 trillion in corporate equities and mutual fund wealth during the pandemic (Federal Reserve, 2021). The bottom 90% of Americans held about 11% of stocks.
There are many reasons for this disparity: slavery, segregation, lack of representation, discrimination, gentrification, lower income, lack of opportunity and so much more. Unfortunately, I don’t have much to say about it other than it is more important now to own things than ever before. History and society have found its way to condition minorities into to risk avoidance through fear and other tactics all the while the money continues to be made for others. Time for you, to get a share. The first way to overcome this barrier is to be knowledgeable so that risk taking will be come second nature. Take a moment and review the various topics in my course Stock Trading and Investing for Beginners to see if there are any gaps in your knowledge about investing. If there are, sign up. If you’re not sure check out my Essential Keys to Financial Presence: Introduction to Investing eBook if you want to get quick dose of investment education. The education should be primary, the comfortability with the stock market comes with time.
If you ask me “What if I don’t trust the stock market?” I would ask you “Do you have a better option?”