On Monday, Oct. 19, 1987, the stock market fell more than 22%, the largest one-day loss in the history of the market.
While people tend to focus on daily rises and falls of the market and of individual stocks, it is important to understand what it means to own stock, and how the stock market performs over time.
People tend to think of investing in the stock market as a kind of greed, and that people who make money on Wall Street are crooks.
While there are certainly some Gordon Gecko’s out there – minus the brick phones – for the most part, stock markets form an important part of our economy, and of many people’s investment strategy.
Owning a stock is owning a percentage of a business. Businesses sell stock to raise capital to invest in growing the business, and to distribute risk across a broad pool of owners. Stocks (or equities) are one of the ways a business raises capital (another is with debt, through borrowing money or selling bonds). When you buy stock, you are participating in the ownership of a company. While on a day-to-day basis the price of a stock can vary quite a bit, over the long-term, it necessarily reflects the underlying performance of the company. As an owner (stockholder), you participate in that performance, for good and bad.
The safest way to invest is to diversify, and a well-diversified portfolio includes a mix of stocks, bonds, and other investments. How you diversify is subject to lots of variables, including your age, risk tolerance, and the time horizon of the investment. Over a lifetime of investing, you are likely to participate in a major “crash” or – as it is euphemistically put – a correction. But if done prudently, you will be better off in the long term by having at least some money in stocks.
- Why would it pay more (over the long-term) to own part of the company (stocks) as opposed to loan it money (bank savings or bonds)? How do the risks compare?
- Why are Wall Street investors often vilified in films? Is it fair?
2, Oct. 2018, Graph depicting Stock Market Crash Oct. 19, 1987 [Digital image]. Retrieved from <google.com>.