Episode 8: What is the stock market?

What is a stock? What are other financial instruments?

Stocks are essentially small pieces of companies that you can actually own yourself. We've established that companies own pretty much most of the things that you use on a daily basis - anything that you don't directly pay for is covered by tax dollars, that then go to a specific company or organization that also receives money. Most consumer products, however, are sold by companies.

These companies want to increase their revenue - that's their bottom line. In order to do that, they have to raise seed funding in order to expand and carry out new functions that will then increase their revenue. They do this by issuing stock in the company. The offering of this stock to a market is known as the initial public offering (IPO).

A stock is partial ownership - it's a teeny-tiny piece of a company issued by that company that is sold off to generate seed funding. A stock is sold in a financial market known as the stock market, where both companies and individuals can buy and sell their stocks. You can either hold on to your partial ownership, or sell it off and make a profit if the price of the stock increases.

Just like other markets, the stock market operates with supply and demand - if the demand for a specific company's stock increases, most likely because they were successful in growing and effectively using the money they got from their IPO to generate significant market value. As a result, more people will want to buy the stock, and the price of that stock will increase. If you bought the stock before it became valuable, you can then sell and make a profit from the stock. If the company succeeds, you can also make money through a company's dividends - payouts they make to any stockholder from their revenue. As such, when you invest in a stock, what you're essentially doing is making the financial prediction that the company you invest in will increase in value over time.

Let's think of a hypothetical tech startup. The founder, Natalie, has created a solid product with a strong value proposal. She sets her IPO at 100,000 stocks for $20 dollars a stock to raise an initial $2 million. She then invests that $2 million to aggressively growing her tech to the point where it makes $200 million in revenue. The stock price would basically be the earnings per stock - with $200 million separated across 100,000 shares, each share would now be worth $2000, which would be 100x more than the original price.

When thinking of individual stock buying and sharing, it's almost like being part of a sports team or a fandom - you're investing your money in the form of ticket sales and merch to create revenue for your favorite artist, so they can keep making amazing music. Over time, your music tastes might change, and you might switch to a different sports team, and somebody else would come take over instead. Let's say you discover someone with 20k streams on Spotify. As a supporter, you buy their albums, show up to every performance, and even design a T-Shirt. They use that money to grow a bigger following, but you get clout as an initial fan. Same thing applies for stocks - you really want to genuinely believe in the stocks you invest in.

Institutionalizing the stock - how does the stock market work?

These stocks are sold in enormous financial markets called stock markets - which are essentially the amalgamation of every transaction of stock being traded. They can include specific industries, types of companies, and company size. These used to be physical spaces, like the New York Stock Exchange in the early 20th century, but have long since evolved to be based on digital processing at a high speed and high level. These exchanges are often measured by a total financial measure known as an index - which tracks companies within a specific industry or exchange. Famous examples of exchanges include:

• S&P 500: measures the performance of the 500 largest companies in the United States
• NASDAQ: measures the performance of major technology companies like Apple, Google and NVIDIA
• FTSE: Measures the top 100 stocks in the UK, the most trusted index there
• DAX: The measure of 40 German industrial powerhouses
• EUROSTOXX: The index measuring the performance of the EU economy
• HKSE: The Hong Kong Stock Exchange index measuring business there
• Nikkei: Measuring the top-performing countries in Japan

These markets are navigated by stockholders and brokers - brokers are the individuals who process these transactions of companies, while stockholders are the actual investors. Brokers make money through commissions. In this process, stockholders can even acquire a portfolio of various different stocks and have a financial advisor to manage their investments.

We can use performance graphs that typically measure the valuation of a stock over time to recognize changes in the price of a stock and even the overall value of a market. When the line on the graph is on an upward trend, it's called a bull or bullish market and is considered to be very positive. If the graph is on a downward trend, that's a sign of a downturned and is called a bear or bearish market

Depending on the market trend, different stocks will have different values. For example, stocks that are typically associated with spending that happens when consumers greater purchasing power and more economic confidence, such as hospitality and airlines, typically will see their stocks dive after periods of low or no growth. These are known as cyclical stocks. Other stocks largely remain constant throughout market fluctuations, since they're more necessary to human survival, like utilities or food. These stocks are called defensive stocks. Depending on when you're investing, cyclical stocks and defensive stocks might be valued differently.

Stocks also change in their pricing in relation to their actual value- highly volatile stocks worth less than $5-1o are often known as penny stocks, since they are so variable , and can lead to serious losses. In contrast, high-value stocks that are known for consistent returns and high valuation are known as blue-chip stocks. If a company is expected to grow rapidly in a short period of time, it's called a growth stock, and if it's valued at way less than it should be, it's a value stock.

Otherwise, stocks also vary in the way they are typically handled by the upper management of companies. A common stock holder is typically paid a limited dividend, and gains value through trading. However, a preferred stock holder can actually receive more in dividends and are typically poised to have some influence in the company - some might even get to vote or weigh in on company decisions, though this is very rare.

What are some of the psychological aspects of stock market trends?

One thing to remember about the stock market... or any financial market in general, is that it's not driven by numbers or rational entities - it's driven by people. Market psychology is a field that looks at how investor and shareholder opinion can actually drive stocks more than the actual value of the stocks themselves. This can be as a result of over-optimism preventing serious consideration of stocks growing infinitely.

Here are four of the biggest cognitive biases that can drive stock market decisions:

1. Herd Mentality: In the stock market, there's a typical tendency to do what everyone else is doing. However, rather than that being a way to put money into successful stocks, it can turn into mindless herd mentality with long-term detrimental effects
2. Instant Gratification: Especially with the rise of day-trading, the stock market can feel like a source of instant gratification, with many people choosing volatile stocks and markets in the hopes of instant payouts, as well as buying and selling stocks extremely fast
3. Overconfidence Bias: Also known as the Dunning-Krueger effect, this is when investors believe that they are more competent and knowledgeable about money than they actually are, leading to worse investment decisions with little regard for long-term consequences

Sometimes, this can lead to a bubble - when the price of a stock or market continues "floating" upwards at rapid speed, before it eventually 'bursts' and crashes down. Two recent examples of market bubbles were the Dotcom bubble that burst in the 2000s, and the housing bubble that burst in 2008. In both cases, stocks severely crashed, and many people lost money getting rid of their stocks.

However, some stocks actually do rise again after bubbles just because they have actual value - for example, in 2000, NVIDIA stock was worth just ¢13, but in 2025, it's now worth $173 dollars. As such, many of the people who started panic selling NVIDIA shares actually missed out on an enormous opportunity. As such, market psychology provides a crucial lesson about investing a

Stock Analysis and Valuation

So how can you actually decide what a stock is actually worth? There's a few different theories around this, and we'll get you started on three very simple ones so you can research more and determine what appeals to you the most.

1. The Fundamentals

Advocated for by older investors, this approach essentially looks at the basic viability of the company itself, rather than trends in the stock price. They often observe the company's revenue and cash-flow statements. They might engage in industry analysis, look at the company's strengths, weaknesses, opportunities and threats, before finally making a decision on which stock to buy. If you're a fundamentals investor, here are some key tools to think about:

• Industry analysis - looking at how different factors (Political, Social, Economic, Technological, Legal, Environmental) will impact the actual company
• Competitors analysis to see how it compares with others in the same field
• Economic outlook and business strategy to see if it aligns

2. The Quantitatives

These investors don't actually care much about the actual strategy and revenue of the company. Instead they're more interested in valuations, often generated by complex statistical and machine learning models that work on the stock market. You can also use quantitative tools in your own investing to actually decide how much a stock might be worth it to you

• Price to Earnings (P/E) Ratio: Calculated by dividing the price of a stock by the earnings per share - if this ratio is high, it can indicate that a stock is overvalued, while if it's lower, it can show a stock not being valued enough
• Earnings Per Share: This looks at the amount of revenue made per share, which you can get by dividing the total revenue by total number of shares
• Market Cap(italization): This is the total value of a company - a large-cap will be in the billions, a mid-cap would be a few hundred million, and a small cap would be even smaller. The market cap often determines the value of a stock, especially for large companies
• Liquidity: How simple it is to sell a stock/turn it into cash. Highly liquid stocks are in demand, while niche, less in-demand stocks have low liquidity
• Volume: The number of stocks of a company that are exchanged over a period of time - high volume indicates demand

3. Value Investors

Opening sustainable capital firms, investing in social enterprises, these investors don't believe in economic growth as much as they believe in their own values and purposes. As such, their investments are guided by their own values and sense of what's important. These investors will typically have a focus on social issues and sustainability interventions, providing valuable funding for the development of community solutions.

You don't have to limit yourself to being just one kind of investor. Instead, integrating and incorporating the tools from different methods of thinking can help you analyse the stock market better - and maybe one day, you can participate too!