FRtR > Outlines > American Economy (1991) > Stocks, Commodities and Markets > Market dynamics

An Outline of the American Economy (1991)


5/12 Stocks, Commodities and Markets


8/10 Market dynamics

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Markets in stocks and commodities form a vital part of the American economic system. Millions of individuals buy and sell small lots of stocks and commodities while mutual funds and trusts trade in large lots. In good times, when it appears that prices will rise, money from savings or from other types of investment flows into the market. When this happens, prices are driven higher. Often a period of speculation follows in which the "bulls," those who make money on a rising market, dominate the market. When the market can no longer sustain the speculative fever, a reaction sets in, selling develops and prices begin to fall. At this point the "bears," or those who make money in a falling market, are the gainers.

During this process the Federal Reserve Board may be trying to curb excesses and stimulate or dampen the market by raising or lowering the margin. The flurry of buying and selling also creates a temptation for some "insiders" (those with access to special information) to try and manipulate the market in a given stock. While this illegal activity was once commonplace, it happens much less frequently now, owing to active policing by the SEC.

A new factor of significance in the market is the volume of funds from abroad that is being invested. Not only has Middle Eastern oil money made its way into American securities, but many people in Europe, Japan and other parts of the world feel that their best opportunity for securing their wealth is to invest in American stocks. This preference for investment in the U.S. economy partially explains the extraordinary strength of the American dollar in the early 1980s. It also, of course, is partly responsible for the gradual upward climb of stock prices in the decades toward the end of the century.

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