7: I've always wondered myself,
8: why do we have to hear this every night, what the stock market is doing.
12: Seventy record closing highs so far...
15: [woman] Blasting through a ceiling In a record-setting IPO.
18: -Investors who've been riding the wave... -[narrator] When the market's booming,
22: we're made to believe the economy is booming.
25: And in America, the stock market has been mostly booming for almost 40 years,
30: [man] As the stock market goes, so goes the wealth
32: and the health of the American economy.
34: What the market is telling us is that we are on the road to prosperity.
38: ...a sky-rocketing stock market, and that benefits everyone.
41: The stock market has gained almost three trillion dollars in value
45: since the election.
47: [narrator] But if you add up all the goods and services bought and sold in the US,
51: the actual economy, that number isn't growing as quickly as it used to.
56: Wages have hardly budged in decades
58: and the average American family's net worth
61: still hasn't recovered from the Great Recession.
64: So what exactly is the stock market measuring?
69: [man] The barometer of America's prosperity has been the stock exchange.
72: Look at the Dow, it's currently up by...
74: The NASDAQ finally hit 5,000.
76: Investors are salivating...
77: -Dividends! -[man] A new kind of gold rush...
81: We are all watching this global economic expansion...
84: We are now in historic territory...
86: A stock buy-back...
87: [woman] It's a fundamentally psychopathic philosophy.
92: [crowd applauding]
100: [narrator] To understand what stock markets are measuring,
102: it helps to imagine a very simple business like a lemonade stand.
106: -Jill is killing it. -[Jill] But I'm thinking bigger.
110: I tried to get a loan, but the bank said it was too risky.
114: The rich investors weren't buying.
116: [narrator] Jill has another option.
118: She can go public, giving anyone who wants to,
121: -the chance to invest in her business... -[clamoring]
124: ...through something called an initial public offering or IPO.
127: Investors pay a certain amount, say a dollar, to own a small part
131: or share of Jill's business.
133: Jill sells a bunch of shares.
135: [Jill] And I grow my lemonade empire!
137: [narrator] Right, Jill can put that money towards opening new lemonade stands,
141: which means more profits.
144: Jill can put some of those profits towards developing new products.
147: She can also give some of that money back to her investors.
150: These are called dividends.
152: She doesn't have to do this, but it does help get people excited
156: about her company and more likely to buy her stock,
159: like Sam. He was sick on IPO day, but he thinks...
163: [Sam] Jill is the smartest girl in the whole world,
166: and I know this lemonade stand thing is gonna be huge.
170: [narrator] So he offers to buy some shares from one of the original investors
174: for twice what she paid for them.
176: He's thinking...
181: [narrator] That's the stock market.
183: It's people buying and selling tiny pieces of companies,
185: based on how much they think those pieces will be worth in the future.
189: Except in real life,
191: it's happening thousands of times a second, all over the world.
194: There are stock markets everywhere,
196: but the New York Stock Exchange is the big kahuna.
199: It's been around since 1792,
201: when 24 stockbrokers put on their finest short pants and top hats
205: and got together under a buttonwood tree on Wall Street in New York City.
209: Today, it's where shares in big traditional companies like IBM
212: and GE are traded.
214: The NASDAQ is the cooler younger brother.
217: It was born in 1971 and doesn't have a physical location.
220: All the trading happens electronically.
222: That's where you find tech companies like Apple and Facebook.
226: So, in America if you want to know how the stock market is doing,
229: you want to know how both these exchanges are doing.
232: That's where indexes come in.
234: They take a whole bunch of share prices and transform them into one clean number.
239: The S&P 500 tracks 500
241: of the largest companies on both exchanges,
244: While the Dow is a lot more exclusive.
246: It only follows the 30 companies it considers the most important.
250: In 2015, it booted out AT&T and replaced it with Apple.
254: The Dow and S&P are big American indexes, but other countries have their own indexes
260: to measure their stock markets.
261: The German stock index, Dax...
263: [woman] London's FTSE 100 index...
265: The Nikkei index...
266: [woman] The Shanghai index...
268: [narrator] Today, many of the world's biggest companies are publicly traded,
272: but that wasn't always the case.
274: One guy, and it was almost always a guy, used to call all the shots.
278: Big corporations of the 1900s, most of them at that time
283: had a single shareholder like Andrew Carnegie,
288: Vanderbilt.
292: Rockefeller.
296: They really exercised very tight control over these businesses.
299: This all began to change in the beginning of the 20th century.
304: We start to see the rise of companies like General Motors
308: and General Electric and RCA.
310: [narrator] Companies discovered what Jill discovered,
313: that if you allow the public to buy shares, you can grow a lot faster.
318: Shareholders want to make money.
320: So if the CEO makes a really bad decision,
322: they'll start selling their shares, which will drive the price down.
326: The opposite is also true. The possibility of a future payout
330: encourages people to invest in risky new ideas.
333: That's the whole idea of the stock market as a force for good.
335: It drives companies to make good decisions,
338: so they have more money to give back to shareholders
341: and more money to grow and create jobs, and that's good for everybody.
345: By the middle of the 20th century, the American public corporation
350: was proving itself one of the most effective and powerful
355: and beneficial organizations in the world.
358: [man] There's a sense of growing prosperity,
360: and the telephone company is a grateful participant.
364: [narrator] Decades after World War II, the stock market helped create the heyday
368: of shared American prosperity.
369: [man] A new era begins, make the system more democratic,
372: increase the flow of capital for the financing of business.
375: The corporation really was supposed to be a vehicle
379: for providing investment opportunities, not just to the very, very wealthy,
384: but to average Americans.
385: It's generating superior returns for investors.
389: Don't you think we ought to invest?
391: [Stout] Millions of secure, well-paid jobs.
394: It's producing innovative products that are bought around the globe.
398: Executives and directors viewed themselves as stewards or trustees
403: of great public institutions that were supposed to serve,
407: not just shareholders, but also bondholders,
410: suppliers, employees, the community.
415: [man] Buick has provided a stomping ground for the cowboy-and-diaper set.
419: And Buick's general manager, Ivan Wiles, drops in.
422: [man 2] Du Pont...
423: Modern chemistry and modern industry join hands
427: in serving our modern America.
430: [narrator] These public corporations helped build the American middle class,
434: and for people who knew how to play it right,
436: trading their stocks could build a fortune.
438: Like this guy.
440: ♪ I've been working on the railroad... ♪
442: [narrator] Folk music is just his hobby. Mostly, he's the billionaire investor...
446: [both] Warren Buffett...
447: -Biggest Wall Street titan of them all. -America's most famous investor.
450: [woman] Investor Warren Buffett is worth 84 billion.
453: [narrator] Buffett is famous for a particular investment style.
456: Value investing, careful analysis of a company,
460: looking at their balance sheet, looking at their business.
463: [narrator] If you don't have time,
465: here's a tip from the man himself.
467: Buy an S&P 500 low-cost index fund.
472: [narrator] An index fund puts a little bit of your money
474: in all companies in the index.
476: Basically, you're hitching your wagon to the stock market.
479: The other option is to give your money to professional investors,
483: who for a fee, try to beat the stock market.
486: Buffett once bet a hedge fund a million dollars that over ten years,
490: an index fund would make more money, and he won.
493: Picking stocks is a hard game but there's one popular strategy.
497: This guy, John Maynard Keynes.
499: You can remember him by his epic mustache.
502: He came up with it. Keynes was a Nobel Prize winner
505: and one of the most influential economists of the 20th century,
509: and he noticed that newspapers would do this thing.
511: [Robert Shiller] They would have a full page of the newspaper dedicated
515: to photos of pretty faces,
517: and you were supposed to pick the six prettiest faces
521: and mark them down in rank order and mail them in to the newspaper.
525: [narrator] The newspaper would rank faces based on how many votes they got,
529: and the winner was the person whose choices matched the crowd's.
533: [Shiller] Let's think about that contest.
535: Do I really just pick what seem to me the prettiest faces?
539: No, I should pick what other people think are the prettiest faces.
543: That's kind of what happens in the stock market.
545: [narrator] It's not the real value of companies that drive their stock prices.
549: It's the most popular story people believe about those companies.
554: Sometimes those stories are backed up by facts.
557: [man] Chipotle stock has plunged more than a third.
560: This comes after several outbreaks, including E. coli, salmonella
564: and norovirus were linked to the chain.
566: An emissions scandal rocking Volkswagen is sending its stock into a free fall.
571: [narrator] But sometimes those stories are all hype.
573: [man] Internet companies are the hottest and most profitable investments
577: -in a generation. -[shouting]
578: They've driven the value into the stratosphere.
581: Lycos, Excite, Yahoo...
583: Those internet stocks continue their meteoric rise.
586: The narrative in the 1990s was
588: internet companies are going to dominate.
590: These companies shouldn't be trying to make profits.
593: That's a good story, which is partly right.
595: We do have companies like Amazon, Google.
598: The problem is that nobody had any way to calibrate this story.
602: How high should the market be?
603: Is it a boom without end?
605: [man] Has the economy changed for good?
607: You know something's wrong when everyone's talking about
610: something like this. It's a bubble, it's like a snowballing effect.
613: It keeps getting higher and higher. It can't go on forever.
617: The Dot Com Honeymoon is coming to a close in many parts of the world.
621: Many dot coms have become dot bombs.
623: [man] 300,000 tech jobs are now gone.
626: [man 2] It's described as nothing short of breathtaking.
628: A points drop never before seen on the US market.
631: It left traders and investors shell-shocked.
634: [narrator] When stock market bubbles burst,
636: it doesn't just hurt investors, it wreaks havoc on the whole economy.
639: Millions of people can lose their jobs, companies go under,
643: and pensions get pummeled.
644: But even when the stock market is up and investors are making money,
648: that can hurt the economy, too.
650: We are heading towards the most acute shortages of energy
653: since World War II.
655: [man] Motorists began lining up before dawn in hopes of getting enough gasoline
659: to take them through the day.
660: [man 2] Are you mad about the way prices have risen?
662: I am thoroughly discouraged and disgusted with the whole thing.
665: [Stout] There was a general sense of concern that something had gone wrong
668: in the American economy.
670: And eventually, the finger got pointed at the way our large public corporations
676: were operating and being run.
677: [narrator] Meet the chief finger pointer-- Milton Friedman.
681: An economist so famous, he was invited onto popular talk shows
684: to help explain his philosophy.
685: Did you ever have a moment of doubt about capitalism?
689: And whether greed's a good idea to run on?
692: Tell me, is there some society you know that doesn't run on greed?
695: [narrator] Remember the wheel? Friedman was not a fan.
698: He thought it should have exactly one spoke, shareholders.
701: In 1970, he published a blockbuster op-ed.
705: [Stout] The famous editorial that ran in The New York Times,
708: in which he said that because corporations were owned by their shareholders,
714: the only obligation of business was to make profits.
718: [narrator] Gordon Gekko's character in Wall Street
720: epitomizes Friedman's philosophy.
722: You own the company, that's right, you the stockholder,
726: and you are all being royally screwed over by these bureaucrats.
730: Greed, for lack of a better word, is good.
735: [narrator] And corporations took his advice.
738: [Stout] They start tying the top executives' pay
742: to share price performance.
744: Well, if 80% of the CEO's pay is based
748: on what the share price is going to do next year,
750: he or she is going to do their best to make sure that share price goes up.
756: Even if the consequences might be harmful to employees, to customers, to society,
762: to the environment or even to the corporation itself in the long-term.
766: [narrator] CEOs put more money towards things that would increase stock prices
770: in the short-term, like cutting costs or buying back a bunch of their own shares
774: to decrease the supply and artficially bump up the price.
777: Between 2007 and 2016, that's how companies in the S&P 500
783: spent more than half their earnings.
785: Another 39% went to their shareholders as dividends,
789: which didn't leave much left to raise wages or expand
792: or develop new products,
794: things that are good for the economy in the long-term.
797: If you have a long-term view that 100 years from now,
801: I still want to be a company, maybe making something different,
804: but I still wanna be here. So the choices that you make
807: in terms of investments and people and in capital are different than
812: if you want to make an investment and generate a return within 24 months.
816: [narrator] In 2012, the Wausau Paper Company was making investments
819: to switch its factories from making printing and writing paper
823: to making tissue paper.
825: But then a hedge fund bought up a bunch of shares
827: and pushed the company to cut costs instead.
830: Their argument would be, "We don't need to do that.
832: What I'd rather see you do is to increase the dividend."
834: As management, we disagreed with that.
836: We offered concessions.
837: We'd take a cut in pay just to leave the doors open.
841: [woman] Wausau Paper says it plans to close the Brokaw Mill by March 31st...
845: [man] Leaving about 450 people without work.
848: The news is devastating, not just to the workers who will lose their jobs,
851: but to the community of Brokaw, where the paper company got its start.
854: December 7th, and I'll never forget that, that's when Pearl Harbor was,
859: but that's the day I was burying my father,
862: and it's the day I lost my job.
864: Then the next day, I came to work, and it was just a madhouse.
867: You know, people just crying.
870: You know, "Why?" You know? And...
875: It was a shock.
876: [Hank Newell] My concern is we've evolved to this much shorter-term view
881: on shareholder rights,
883: versus a longer-term view on stakeholder responsibilities.
888: This is a trend that's been going on for a while
891: and has gotten even more powerful and important.
895: It's seriously threatening the ability of our corporations
899: to pursue the kinds of projects that lead to long-term corporate sustainability
904: and economic growth.
906: [narrator] Laying off workers, closing factories, keeping wages low.
910: These are things that are bad for the economy overall,
913: but can be great for a company's short-term profits
916: and that's what the stock market cares about.
919: The stock market got off to an impressive start...
921: Another record today...
923: A day for the record books on Wall Street...
924: The US economy charges ahead and so do the bulls on Wall Street.
927: This was a big day on Wall Street...
929: The S&P 500 has raced out to a new all-time high.
932: [narrator] As the stock market has grown, so have CEO paychecks.
938: In 1973, the average CEO made about 22 times more
942: than the average worker.
943: By 2016, it was 271 times more.
948: And as the stock market has grown bigger, fewer Americans have benefited.
953: The share of Americans invested in the stock market is at its lowest point
957: in 20 years, as the middle class dropped out.
960: So it's no surprise that as stock prices have gone up in the United States,
964: so has inequality, but it doesn't have to be this way.
969: Stock markets give people a chance to decide
972: which companies deserve to succeed, which ideas are worth a gamble.
976: There's something about giving people games to play.
979: You look at successful countries and they all have stock markets,
983: and countries that tried to shut them down
986: are coming around and instituting them now.
988: [narrator] Stockholders can influence how companies behave,
991: whose interest they take into account.
993: Most of us are thinking about our long-term futures.
997: We care about our neighbors and our children and our grandchildren.
1002: We have values and morals and want our companies to make money
1007: by doing things that are good for the world
1010: and not by harming people and destroying it.
1013: That's what most shareholders really want.
A video which explains the stock market in simple language. Studios and Vox, this enlightening explainer series will take viewers deep inside a wide range of ...
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