HOW TO EXPLAIN THE US STOCK MARKET TO A 5 YEAR OLD CHILD

If you want to know and understand all about US stock market (explained) in a simplest way, this article is for you.

I would start by telling the story of a boy named John

John is a 5 year old pupil of Brainfield Academy

His father – James is a successful Businessman who sells cookies

John seeing his father do well in business decides that he wants to start his own cookies business as well.

So from the money he had saved, John starts his business – selling cookies to his fellow pupils in school

Everyday during lunch, pupils from all grades would line up to buy cookies from John

John always run out of stock as the demand is really high.

John is really doing well in business and he decided to expand his business and also sell to neighbouring schools.

But he doesn’t have much money to expand.

He reaches out to his father to invest in his business, his father refuses.

He reaches out to bank for loan, the bank declined.

Then John decides to sell part of his company to investors to buy into his business.

These investors are called shareholders and they happen to be the teachers at Brainfield Academy.

They invest in John’s business and John gives them a percentage of the company.

John now has more money to grow his cookie business.

The more John does well, the more the shareholders are happy and they invest to buy more shares (percentage) in John’s cookie business

Every 3 months, John holds a meeting with his shareholders and gives them feedback on how the company has performed during that period and what plans he has for the company

This meeting is called Earnings Reports

At this meeting, John shows how much money the business has made, the profits and he announces a decision to expand to 5 more schools to sell the cookies.

The shareholders are really happy with this news and there’s a huge demand in the shares of John’s company.

Shareholders invite their friends and family to buy into this business.

Because of the huge demand, the share price of John’s business increases. John gets richer, investors gets richer and the business continues to prosper.

Due to this success, at the next Earnings Reports, John announces that he would give his investors a part of the profits the company has made – known as Dividends.

These investors can either sell their shares to other investors for a profit or they can decide to hold on to their shares and allow the investment grow bigger.

Now, pause for a moment…

Imagine just like John, there are 3,000 other businesses like this.

And instead of meeting John directly to buy into the business, everything is now done with your smartphone.

And you’re not meeting anyone to buy shares for you.

You simply register with an app (Bamboo, Trove, Chaka) that allows you buy into John’s business.

You then have access to John’s business and other businesses.

That is how the US Stock Market is.

You buying shares of different businesses for a profit

You can either make money when the price at which you bought increases or you get rewarded with a percentage of the company’s profits (known as dividends).

So from your phone, you can have access to shares of companies like Apple, Microsoft, Google, etc

Also, different factors cause the rise and fall of the share price of these companies – just like John’s business.

He can make a poor decision that reduces the growth of the cookie business and investors gets disappointed and end up selling their shares of the company.

HOW TO EXPLAIN THE US STOCK MARKET TO A 5 YEAR OLD CHILD

This causes the drop in share price of the company – this is a microeconomics issue as the drop is caused by factors within John’s control.

If investors still believe in John and they see this error as a mistake, they won’t be bothered by the fall in share price.

They would instead see it as an opportunity to buy more shares at a lower price (buying the dip).

Also, external factors like rise in cost of the raw materials to prepare the cookies (flour, sugar, salt, etc) can affect the production of cookies and could cause reduction in sales and revenue.

Also, if there is fighting going on in other schools and pupils can’t come to school, it would affect the sales of the cookies which in turn affects revenue for John’s company.

Or if a pupil is sick with a disease in another school (c*vid), the school closes temporarily (lockdown) so as to limit the spread of the disease, these would mean lower revenue for John’s business (except if he begins to deliver the cookies to their homes directly)

Or if the principals of other schools (government) places a ban in sales of cookies, John’s business would be affected.

These would severely affect growth of John’s business.

And if investors feel this decision would be bad for John’s business, they may want to sell their shares and look for other businesses to invest in (maybe MaryJane’s pencil business or Fredrick’s perfume business).

These actions causes the share price of John’s company to fall.

These are macroeconomic issues as the drop isn’t what John could control.

To think about how the stock market operates is to think about how businesses operate

If you understand how businesses operate, you’ll understand well how the stock market operates.

I hope this helps?

P.S: If this made sense to you, please kindly share this post so others can learn.

HOW TO EXPLAIN THE US STOCK MARKET TO A 5 YEAR OLD CHILD