The Economy and the Stock Market

Hispanic businessman talking on telephone
This photo shows a stockbroker, a person who buys and sells stock for clients. A person who has stock owns a small part of a company.

In the news, you might hear the words stock market and economy. What do these terms mean? How are they different?

Economy An economy is a system in which people earn money to pay for what they want and need. In a good economy, there are lots of jobs that pay people well, and businesses are making money. In a bad economy, people are losing their jobs, and businesses are shutting down.

Stock Market A stock market is a system for buying and selling stocks and bonds. If you own stock, you own part of a company. A bond is an agreement to lend money to a company. Companies sell stocks and bonds to get money that they need to grow their business.

How are the economy and stock market related? If the stock market is doing well, that means many people are investing in companies. They are confident these companies will make money. With money, these companies can hire more people to do jobs. Often people assume that if the stock market is doing well, the economy is doing well, too. That’s not always true.

The stock market is a system for big companies. A lot of big companies were not hurt as much by the COVID-19 pandemic, so their stocks are doing well.

But most of the people in the United States work for small companies. Many small companies have lost money during the pandemic, and a lot of people have lost their jobs. The small companies aren’t part of the stock market. That’s why the stock market can do well even when the overall economy is bad.

What Do You Think? How are the stock market and the economy related? Which do you think is most important to most people?

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