"It's just institutionalized gambling!"
"It has nothing to do with my life."
"It's not real money, it's all virtual."

These are phrases you may hear from some ignorant, uninformed quarters in connection with the money markets. But don't listen to them. They are fools. The truth is that the money markets are not just relevant, but also essential to our lives — they have almost become assimilated into our atomic structure. To find out why, let's go back to the beginning.

How It All Started

A trader makes a transaction in 1935.

The first stock market was invented by one Arthur Anderson, a fishmonger in New York. Seeing the trawlers go out one morning, he realized he could sell pieces of paper promising the owner a share of the day's catch. The system proved a roaring success and in 1804 the first stock exchange was set up in Anderson's shed. This was where the buying and selling took place for nearly forty years.

Fittingly, when Anderson died he was buried underneath the shed (it fell on him during an earthquake). Nowadays that shed has become the New York Stock Exchange, just one of many around the world. You may have heard of London and Tokyo.

How do Stocks Work?

Let's take an example.

Imagine a company which sells fast food — let's call them McCrappo. You learn from someone high up in the company that they are about to bring out a new burger that will sell like hotcakes. You'll be thinking "Jiminy Cricket, I wish I owned that company." Well, you can! You can buy a share of that company. (Don't be fooled by the anti-capitalist terminology; it is not literally shared — it's all yours.)

This is what a stock certificate looks like (enlarged 1000 times). You get one of these for each share you own.

How do you buy your share? Of course you would never do it yourself, just as you would never grow your own food. The idea is absurd. Just as there are supermarkets for buying food, there are supermarkets for buying shares. This is where the broker comes in.

The broker acts very much like an estate agent, in the sense that they do very little and get a commission. There are two types of broker: a stockbroker and a discount broker. Stockbrokers will advise you and carry out research on your behalf; discount brokers do not advise or research, they just take the money. For even less rigorous service you can use your high street bank.

Brokers pass the request on the floorbroker, who does the actual buying and selling by shouting down several telephones at once, gesticulating as if in the throes of an epileptic seizure, and staring, with tearful eyes, into the middle distance.

What Happens When You Own Shares?

Let us simplify matters by taking a small example. Let's say you own a company which makes ocean liners. In order to build your first liner you need several hundred million dollars to pay for premises and workforce. You must ask someone for this money. Instead of asking one person for the money you ask several hundred million people to donate $1 each — they have one share in your company.

Let's say that your shipbuilding corporation makes a profit of $5 million in its first year. The Directors have several options to choose from when they decide what to do with that money:

• They can reward themselves a pay rise to the value of $5 million.

After you have made one ocean liner your company gets taken over by the world's largest ocean liner manufacturer, in order to destroy the competition. The large company sacks almost everyone in your company and the resulting cash bonus is paid to the shareholders as a dividend.

Shares can go down as well as up. How rich would you have been if you had had have invested a dollar in 1900?

What is a Dividend?

I just told you.

But it's not just microscopic dividends that you will receive every few years — if you own stock you also have a right to:

• Attend the corporation's AGM.
• Vote for the status quo.
• Receive over-designed, incomprehensible financial pamphlets once per quarter.

The big money, however, is made when your share value rises as people clamour to buy them. And you will lose money when your share price plummets. Don't worry though — overall, share values go up over time, as the graph shows.

Why Do Stocks Go Up and Down?

Stocks go down after you purchase them. They go up after you sell them.

Buying Shares: What to Look For

Before you buy shares in a company, check that it fits these criteria:

• Is it a successful company? If it hasn't made a profit then it is probably not worth investing in.
• Do you know anyone who works in the company? They may be able to give you information about future strategy that will enable you to buy shares before they grow in price.
• Do you work for the company? Use your judgement to buy shares when the going is at its worst.
• Are you a director in the company? Remember to sell your shares before announcing bad news.

Tracking your Stock

Use your daily newspaper or the internet to keep an eye on the performance of your stock. At first the charts will seem like meaningless collections of numbers, but use the guide below and you will soon make sense of it.

a Current price b Yield (measured in numerics) c Percentage net scrip d P/E ratio, usually a prime number e Shows the stock is crumbling f Dividend minus gross volume by weight g Not sure what this means h Occluded front Notice that the figure in the Market cap column is always given as a prehistoric symbol. This dates back to the days before computers.

Rules

You may wonder how such an open system remains honest and fair. Well, there are very strict voluntary codes of practise that ensure the system is not abused by unscrupulous parties.

For instance, as an investor you are not allowed to purchase shares in a company if you are in receipt of "inside information." Simply make sure your contacts are all verbal. It is of course clearly in the public interest that the system is not heavily burdened with legislation and punitive punishment, otherwise the frenzied money-making might grind to a halt. Remember this before you start whining about child labour in Indonesian sweatshops.

The Bigger Picture: Stock Averages

Frenetic activity at today's Tokyo Stock Exchange.

When you accidentally switch to the financial news on TV you will see captions like "Dow Jones Industrial Average" and "FTSE 100" moving along the bottom of the screen. These are simply referring to collections of the largest corporations, such IBM, General Motors, ICI, WorldCom, Enron, etc. Their stock value is averaged, and that figure represents the financial health of the country as a whole. So if you are a shareholder and that figure drops by, say, one hundredth of a percentage point, you'd better think about selling your shares in everything. Panic selling like this can precipitate a market crash with dire consequences for the world economy, so make sure you sell very quickly.

If you own a company and a market crash appears likely, you would be well advised to consider downsizing (redundantizing). Fortunately nowadays computer technology has made such buying, selling, and wholesale destruction of lives and communities a simple and instantaneous matter.

The Modern Markets

As we have seen, nowadays computers shuffle electronic money around in less time than it takes to blink an eye. This, coupled with the detachment of money from goods, has turned the stock markets into something akin to a global bookmakers. Today the markets are so far removed from normal people's everyday lives that they cease to have meaning.