To understand the money management business, one first has
to understand the stock market and how it works.
First one needs to realize that when people say “the stock
market” they mean all of the equity markets around the
world. And while many of us believe that New York is the
center of the universe for everything, many others believe
that those of us who think this way are egotistical snobs.
When it comes to trading stocks, though, New York is truly
the place. Sure, there are other markets around the globe in
all the major cities of the world, and there are markets
throughout the United States; but everything everywhere
having to do with the equity markets gets its cue from the
seven square miles that is New York City and the mythical
place we all call Wall Street.
In order to understand the stock market and how it works it
is important to have a clear understanding of what a stock or
equity is (stocks and equities are the exact same thing, and the
terms can be used interchangeably). According to the Dictionary of Business Terms, there are two types of stock: common
and preferred.
Common stock security representing an ownership interest
in a corporation. Ownership may also be shared
with preferred stock, which has prior claim on any dividends
to be paid and, in the event of liquidation, to the
distribution of the corporation’s assets. As owners of the
corporation, common stockholders assume the primary
risk if business is poor, realize the greater return in the
event of success, and elect the board of directors that controls
the company.1
Preferred stock part of the capital stock of a corporation
that enjoys priority over the remaining stock, or
common stock, in the distribution of dividends and in the
event of dissolution of the corporation, also in the distribution
of assets.2
Now let’s explore the markets and how they work.
Brokers have been trading stocks in the United States since the
1700s. However, organized buying and selling of stocks started
at the foot of Manhattan near Wall Street and are shrouded in
scandal. According to Charles Geisst, a leading Wall Street historian,
there were few if any formal rules or regulations governing
the trading of stocks until speculator William Duer caused a financial
meltdown. Duer, a British expatriate, was a land speculator
who borrowed large amounts of money from banks. He
overextended himself and could not pay off his debts, causing
some banks to fail and others to become very nervous that a
landslide effect would hurt their balance sheets and in turn cause
the nation’s financial system to completely collapse.