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Payton Layne

Professor Leonard

English 1201.511

2 May 2021

The Stock Market and Its Recent Developments

When you hear of the Great Depression, one of the first things that comes to mind is the

Stock Market Crash of 1929. The crash was the beginning of an era that America hopes it will

never have to experience again. However, have you ever wondered what causes a stock market

crash? Or how a stock market crash can cause a country to enter such a horrible recession? While

many people have heard of the stock market, most do not actually understand how it works. In

simple terms, the stock market is a combination of markets and exchanges where stocks are

actively bought, sold, or issued. However, there are many questions about the stock market such

as how it affects our lives, and the way it operates. The stock market is not only an open

marketplace with many components, but it is affected by current events going on throughout the

world.

History of the American stock market dates back to the late 1700s when the first

American stock exchange, the New York Stock Exchange (NYSE), was created in 1792. The

NYSE was founded when twenty-four merchants signed the Buttonwood Agreement to organize

secure trading in New York City. The NYSE has remained a physically located stock exchange

on Wall Street and has grown into the world’s leading stock exchange (Devenger). The second

leading and other important exchange is the NASDAQ. It was founded in 1971 and unlike the

NYSE, NASDAQ does not have a physical location, but is instead an online trading platform

(Vox Media). These stock exchanges are where people can participate in the buying and selling
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of stocks. The combination of these stock exchanges along with other markets and trading

systems create what is called the stock market.

The first component to understanding the stock market is to understand what a stock is. In

the simplest definition, stocks are all of the shares into which company ownership is divided

among its shareholders. Why would a company want to give away a part of its ownership? Say

for example, a cookie company wants to expand their business such as experimenting new

cookie flavors or opening more locations. However, they may not have enough money to do that,

so instead they ask the public for money in return for shares, small pieces of ownership in the

company. When a company first issues to sell their stock, it is called an initial public offering

(IPO). In the cookie company’s case, the IPO is the initial price they ask for in return for a share.

An initial public offering allows a company to raise capital from public investors who buy shares

of the company (Chen). After a company has released its shares through an IPO, the common

concept of supply and demand determines the price of the stock. If people start to realize how

good the company’s cookies are and think that the company has a bright future, they may decide

they want to buy its stock. As more people want to buy the cookie company’s stock, the stock

price goes up.

A common misconception is that a company’s stock price reflects how well a company

is doing. While this may sometimes be the case, it is not always true. For example, Tesla’s stock

price has gone up over $500 in a year. Tesla’s stock reached its all-time closing price on January

26th, 2021 at $883.09. However, if you look at Tesla’s twelve-month net income for 2020, it was

only 690 million dollars, compared to General Motors who had a twelve-month net income of

6.247 billion dollars (see Fig. 1). In fact, 2020 was the first year Tesla has had a positive yearly
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net income since they were founded. Despite the greater profit, General Motors’ stock price is

only up around 160% in the last year and currently at $56.60.

Fig. 1. This chart shows the net income of General Motors (blue) and Tesla (orange) over

the last ten years (Macrotrends).

There are many reasons for why a company with as little revenue as Tesla can also have

an extremely high stock price. Furthermore, the most common reason is that a company provides

an innovative idea that investors have faith in. This is the case with Tesla as recently Tesla has

given people a lot of hope. Tim Levin from Business Insider says “Tesla's growth has inspired

confidence”. After not being profitable for years, Tesla has finally had its sixth straight profitable

quarter and first profitable year. Tesla’s profit has started to rise, and investors believe the sky’s

the limit for a fast-growing company such as Tesla. Despite having a greater profit as of now, a

company such as General Motors does not display as much innovation as a company like Tesla
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does. The result is, recently, people have started to pour their money into Tesla which has driven

their stock price as high as it is now.

Another factor playing into the growth of a stock is whether the company offers

dividends. Dividends are quarterly payments given back to investors based on the number of

shares they own of that company. Companies that offer a dividend will provide what their

dividend yield is. A dividend yield is then multiplied with the stock price which equals the stock

dividend. For example, a company with a current stock price of $50 and a dividend yield of 3%

would have a $1.50 stock dividend. The investor then receives however much the stock dividend

is times the number of shares they own. In this case, if the investor owns twenty shares of the

company with a $1.50 stock dividend, they will receive $30 that quarter. Dividend stocks are

popular among those who are retired because they are able to provide a source of income.

However, some people who do not need the dividend income reinvest their dividend

check through a dividend reinvestment plan (DRP). A dividend reinvest plan is most common

among those who are still working and do not need the extra dividend income. Stocks that pay

out dividends and offer dividend reinvestment plans are referred to as turtle/value stocks because

they grow slower. They grow slower since they pay out dividends. Looking back at General

Motors, General Motors is referred to as a value stock because they have proven to have a stable

revenue stream each year, and their stock does not have much fluctuation. A value stock is meant

for a person looking for a stable stock and a dividend income.

Contrary, stocks that do not pay dividends are referred to as hare/growth stocks because

they grow quicker. An example of a growth stock would be Tesla, who is a company within an

emerging industry that offers plenty of growth. Tesla also does not pay out dividends but instead

puts any available cash back into their business to generate faster growth. Although growth
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stocks can rise more quickly, they can also be riskier. Growth stocks are more popular to those

who want to grow their money more exponentially and have plenty of time until they need to

take their money out. Both growth and value stocks have their own benefits and are equally

represented in today’s stock market.

The overall market can be evaluated by market indexes which are a collection of stocks

that represent segments of the financial market. The two most common market indexes are the

S&P 500 and the Dow Jones Industrial Average. The S&P 500 is an index of the 500 largest

publicly traded companies (Kenton). The Dow Jones is an index of 30 large blue-chip companies

which was originally designed to represent the health of the broader U.S. economy. Both the

S&P 500 and the Dow Jones have the same purpose of providing the big picture of stocks in the

stock market. However, the S&P 500 is preferred by more investors due to its incorporation of

more companies. Due to these two indexes representing the market as a whole, when these two

indexes drastically drop, it is known as a stock market crash.

Over the last one hundred years, there have been three major American stock market

crashes. The most famous one being the Wall Street Crash of 1929 when the Dow Jones dropped

25% in just a few days. This crash was a result of overproduction in factories and exuberant

investors who took on too much debt in hopes of stock prices continuing to grow to extreme

prices. The situation led investors to begin cashing out their stocks and withdrawing money from

banks. The Crash of 1929 was later followed by the Great Depression. The second major crash

was the Black Monday Crash of 1987 when both the Dow Jones and the S&P 500 dropped over

20% in a single day. This drop was a result of new computer programmed trading models that

allowed for larger and quicker orders. However, this also made it more difficult to stop trading

when prices began to drop rapidly. Luckily, this crash did not result in a recession. The third and
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most recent crash was the COVID-19 Crash of 2020 when “between February 12th and March

23rd, the Dow Jones lost 37% of its value” (Frazier, see Fig. 2). The Crash of 2020 was a result of

the nationwide lockdown that was put into effect to prevent the spread of COVID-19.

As mentioned earlier, the stock market is constantly affected by current events going on

throughout the world. The biggest factor recently has been COVID-19. COVID-19 has had

multiple effects on the stock market including a market drop, a rise in technology stocks, and an

increased number of investors. The stock market first began to fall in late February and then

intensified during March. The beginning of the market drop was caused by the early effects of

Coronavirus on the oil industry. The price of oil started plummeting when factories in China

started to shut down to reduce the spread of COVID-19. Additionally, OPEC (Organization of

the Petroleum Exporting Countries) was unsuccessful in reaching an agreement concerning oil

production causing the price of oil to drop even more. As oil prices dropped in late February and

in the beginning of March, the U.S. stock market was affected. Oil companies such as Exxon

Mobile and Chevron both fell over 10%, and the oil scare continued over to companies such as

Apple who fell 6%. Eventually, people began to realize that Coronavirus was more serious and

could have a much larger impact on the world than just oil prices.

Matters started to get more serious on March 9th, 2020 when the Dow dropped 2,014

points, or 7.8%. This was a result of the continuing oil crisis between Saudi Arabia and Russia,

as well as fear in the growing number of Coronavirus cases. As concerns of travel rose and cases

were rising in Europe, President Donald Trump announced on Wednesday March 11th that the

U.S. would ban travel from Europe. Then on the following day, the Dow had its sixth worst

percentage drop ever falling 2,352 points. Then on March 13th, the Dow Jones changed course

for a day and finished up 9.4% from the following day. This was most likely a result of President
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Trump announcing that 50,000 new Coronavirus tests would be available the following week as

well as the possibility of a fiscal stimulus from the government. However, the following Monday,

“on March 16, the Dow plummeted nearly 3,000 points to close at 20,188, losing 12.9%. The

drop in stock prices was so massive that the New York Stock Exchange suspended trading

several times during those days” (Frazier). Overall, the stock market crash was a result of the

spreading COVID-19 which led to lockdowns and economic shutdowns. By studying the stock

market trends, one can figure out that the stock market is constantly affected by what is going on

around the world. In this case, the stock market dropped as a result of the Coronavirus outbreak.

Fig. 2. This chart shows the stock price for the Dow Jones Industrial Average from November

2019 to November 2020. The large drop in stock price was a result of the COVID-19 pandemic

(Macrotrends).

While Coronavirus caused the stock market to drop as a whole, it also affected specific

types of stocks in different ways. One group of stocks that skyrocketed despite most stocks
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falling was the technology sector. An example is the videoconferencing service Zoom which at

one point was up 500% from the start of the pandemic. Other stocks such as Amazon, Ebay,

Nvidia, and Netflix all performed well. During lockdowns, people were stuck at home which led

to these companies prospering in a time of darkness. However, stocks that relied on people to

leave their homes did not do so hot. Some of the worst performing companies include cruise

lines such as Norwegian and Carnival, and airlines such as Delta and American Airlines. These

stocks were directly hit due to the restrictions placed on people which caused the companies to

lose major profit. Many of these company’s stocks have still not recovered. This is a prime

example of how specific types of stocks can be directly affected by events going on in the world.

The stock market not only reflected the negative impacts of COVID-19 but also bounced

back at a record pace due to a record number of investors. Beginning in April, the market started

to go up which seemed impossible and puzzled many since it did not reflect the economy. At the

time, unemployment numbers were getting higher, the economy was shut down, and no vaccine

was in sight. So how was the market suddenly going up? This happened due to a couple different

things. The first thing happened on March 27th when the largest federal stimulus package in

history was signed into law. The package gave $1,200 to millions of Americans, additional

unemployment aid to those who lost their jobs, and loans to small businesses. Liz Frazier, who

holds an MBA from Wake Forest and is a member of the National Association of Financial

Advisors, claims that as a result, “cautiously optimistic, investors began to wade back into the

market, quickly swimming out deeper” (Frazier). In addition to the stimulus package creating

hope, many people also saw this as an opportunity for substantial returns. A record number of

first-time investors, many younger people, started taking advantage of the low stock prices.

Many of which had never purchased stocks before due to the high prices.
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As investors started to get more involved again, they put their money towards stocks that

were still operating despite the pandemic. Soon, the market began to bounce back as technology

and pharmaceutical companies skyrocketed in value. Eventually, the record number of investors

led to momentum which soon took over the stock market creating a rebound like never seen

before. Not long after the crash, “by August 17th, the S&P 500 was up 27% from its low, setting

new records again. By November 2020, US markets finally returned to January levels with the

Dow passing 30,000 for the first time in history on Nov. 24” (Frazier, see Fig. 2). Despite the

incredible stock market rebound, the unemployment rate was still high, and the economy was not

back on track yet. This is a representation of how the stock market does not always reflect the

economy but is still affected by current events and decisions made by people around the world.

In addition to the COVID-19 pandemic, another recent event that has impacted the stock

market was the GameStop stock saga. The GameStop stock saga was a battle between common

investors and hedge funds. Hedge funds are an alternate investment strategy famously known to

use short selling. Due to the high risks of short selling, only high net worth individuals are

typically associated with hedge funds. Short selling is when an investor burrows shares of a stock

and sells them at market price. The investor then buys back the shares at a lower price before

having to return the stocks to the lender, thus pocketing the difference. It is essentially betting

against a stock and expecting the stock to go down. For example, a random stock is trading at

$50. A short seller would then burrow a number of shares, say 100 in this case, and then sell

those to another investor. If that stock then falls to $40, the short seller can decide to close their

position which means to buy the 100 shares back at $40 a share. The short seller would then

return the shares back to where he burrowed them. Ultimately, the short seller would have made
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$1,000 because he sold 100 shares for $50 (100 x 50 = 5,000) equaling $5,000, and then bought

them back at $40 (100 x 40 = 4,000) equaling $4,000 (Hayes).

However, if the stock continues to rise, short sellers either must have the money to cover

themselves or sell their position. For example, the same stock above that is selling at $50 a share

goes up to $60 instead of dropping. If the short seller decides to sell their position, they will buy

back the shares. By doing so, the short seller would lose $1,000 instead of gaining that amount

because they had to buy the 100 shares back at a more expensive price then what they sold them

for. If the short seller does not want to sell their position, then they must have enough money in

their account in case the stock continues to rise (Hayes). They would only cover their position if

they still believe that the stock will drop below what they originally bought it for. Overall, short

selling is very risky because a stock can grow infinitely resulting in unlimited losses. Therefore,

short selling is typically only performed by very wealthy people who are able to afford such loss.

The concept of short selling was relevant in the GameStop saga. Thousands of common

investors pushed GameStop’s stock price up by investing lots of money, while big hedge funds

tried short selling it. The saga started as early as January 13th, 2020 when the stock rose over

50% from $19.94 to $31.40 a share. This came as a result of GameStop appointing three new

directors to its board. The appointing of these new directors started conversation on the famous

Reddit page r/wallstreetbets led by individual investor Keith Gill (Thorbecke). Gill was very

vocal of GameStop’s stock leading up the saga, and records of Gill’s GameStop portfolio date all

the way back to September 2019. Gill encouraged others to invest in GameStop, convincing

people that it was undervalued. As the price started to rise, more and more people began short

selling the stock because many did not believe the stock could rise much further. This led to a

narrative that it was the common investor vs billion-dollar hedge funds. As the week continued,
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more people bought in which caused the stock to close at $147.98 on January 26th. On top of the

momentum already present, after markets closed on January 26th, Elon Musk tweeted the term

“GameStonk” and a link to r/wallstreetbets forum (Thorbecke). This brought national attention

to the situation and suddenly even more people wanted to be a part of the rising stock. This led to

the stock rising nearly 140% to $347.51 the following day. The rising stock caused many hedge

funds to lose millions of dollars. One specific hedge fund that bet heavily against GameStop,

Melvin Capital, ended the month of January with $4.5 billion less in assets than before.

While Coronavirus and the GameStop stock saga are two of the most popular events,

there are several more current events going on throughout the world that are affecting the stock

market. Each event can either affect the stock market as a whole or affect stocks individually.

Coronavirus caused the stock market to crash as a whole but also impacted individual stocks

differently. The GameStop saga only affected a single stock but allowed people to notice the

different types of participants in the stock market. Overall, the stock market has many

components, each of which is affected differently by current events going on throughout the

world.
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Works Cited

Chen, James. “Stock Market.” Investopedia, Investopedia, 16 Sept. 2020,

www.investopedia.com/terms/s/stockmarket.asp.

Devenger, Nancy. “Stock Markets.” Salem Press Encyclopedia, 2019. EBSCOhost,

search.ebscohost.com/login.aspx?direct=true&db=ers&AN=89163986&site=eds-live

“Dow Jones - 10 Year Daily Chart.” MacroTrends,

www.macrotrends.net/1358/dow-jones-industrial-average-last-10-years.

“Explained | The Stock Market | FULL EPISODE | Netflix.” YouTube, Vox Media Studios,

17 Apr. 2020, www.youtube.com/watch?v=ZCFkWDdmXG8.

Frazier, Liz. “The Coronavirus Crash Of 2020, And The Investing Lesson It Taught Us.”

Forbes, Forbes Magazine, 4 Mar. 2021,

www.forbes.com/sites/lizfrazierpeck/2021/02/11/the-coronavirus-crash-of-2020-and-

the-investing-lesson-it-taught-us/?sh=4d86332546cf.

Hayes, Adam. “Short Selling.” Investopedia, Investopedia, 24 Mar. 2021,

www.investopedia.com/terms/s/shortselling.asp.

Kenton, Will. “S&P 500 Index.” Investopedia, Investopedia, 24 Mar. 2021,

www.investopedia.com/terms/s/sp500.asp.

Levin, Tim. “Tesla's Stock Price Has Left Wall Street Analysts Scratching Their Heads.

Here's What's Fueling the Searing Rally.” Business Insider, Business Insider, 7 Feb.

2021,

www.businessinsider.com/tesla-stock-price-rally-explained-elon-musk-electric-vehicl

e-frenzy-2021-2.
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“Net Income Tool.” MacroTrends,

www.macrotrends.net/stocks/stock-comparison?s=net-income&axis=single&comp=

TSLA%3AGM.

Thorbecke, Catherine. ABC News, ABC News Network, 13 Feb. 2021,

abcnews.go.com/Business/gamestop-timeline-closer-saga-upended-wall-street/story?i

d=75617315.