I once knew an engineer. If you've had the privilege of knowing what engineers are like, you'll know they tend to be very curious. They always want to break things up and piece them back together. The engineer I knew couldn't work out one thing, however: they never could wrap their head around what on earth DNA is. No matter how many times I tried to explain it, they couldn't grasp the fact that DNA is made of wee little building blocks called proteins. These proteins get strung together on a ladder, and the sequence of the rungs of the ladder write your genetic code. Bigger proteins then read your code like a recipe and make you who you are.

DNA to the engineer is what the stock market is to a lot of people. No matter how many times it gets explained, it just doesn't make sense. How does it work? Where does the money go? No matter how many times we try to research it, it can be so hard to grasp. What does it mean, where do the men in suits who shout on the phones come into it? What are all the numbers on the screen and what are those red and green arrows for?

Well, it's time to crack the code about what the stock market is, and what better way to do it than with a classic lemonade stand analogy?

Sim's Lemonade

Imagine I own a lemonade stand. And since I'm a savvy business owner, let's imagine that the stand does extremely well. From the get‐go my stand grows immensely: people from far and wide come to buy my lemonade. Business is booming.

But there is only one of me; I only have one stand, and in order to grow, I need to expand to newer markets. One day I decide to open another stand in the next neighbourhood. However, to do so I need another stand, I need more cups, more lemons, and I need to hire someone to manage that stand full time and I need someone to bookkeep. All these things cost money.

Money I don't have. Sure, I could use my profits to do this, but I have a life to live, so that's out of the question.

The next option is getting a loan from a bank, but a loan means paying it back, with interest on top of it. Compound interest is fun when you get the compounding benefits, but it's not so fun when it's a loan you have to pay back.

So what does a business owner like myself do to raise some extra cash? I could sell some shares (or stocks, the two terms mean the same thing) in my company. This means breaking my company into pieces, or shares — it can be any number, 1000 or a million — and then selling these shares to investors.

This process is called an IPO, or initial public offering. It's basically when companies get to shout from the rooftop that they're going from a private company to a public one. Have you ever seen a CEO ringing a bell at the New York Stock Exchange with balloons behind them? This is the moment they officially ‘go public’. This is why you can buy shares of some companies, such as Coca‐Cola, but not of your locally owned café or fish and chips shop. Coca‐Cola is public, but the local fish and chips shop is still a private company.

The benefit of becoming a public company is that I make money from selling shares to investors, and I don't need to pay it back — it's a sweet deal.

When Twitter was expanding, it decided to have an IPO in September 2013. They worked with Goldman Sachs to get it done. (Fun fact, if you ever wondered what on earth investment bankers do, part of their job is to hold the hand of a company through the IPO process, helping them choose what share price to set the IPO at, etc.)

Twitter had not yet turned a profit by the time it was about to launch its IPO, but it ended up being the most anticipated IPO of the year. It was a huge success, raising the company $2.1 billion. It made co‐founders Jack Dorsey and Biz Stone instant billionaires. (Another fun fact: Jack Dorsey left Twitter in 2022 to pursue his passion for cryptocurrency.)

The company used a lot of the cash to reinvest in the company, expanding their hardware, acquiring other companies, and majorly re‐designing their user interface and their widely successful ‘instant timeline’. By investing back into their brand with their IPO money, Twitter was able to establish itself as the technology giant that it is today. And they didn't have a loan to pay back. No wonder companies are so eager to go public!

So back to my lemonade stand. We're no Twitter but we want to grow, and preferably without taking a loan from a bank. Having debt is a bad idea for my business, so instead I announce to the world I am going public, get into the press to create some hype around the IPO and prepare as the launch date approaches.

The day we go public, I break my company into 1000 pieces. I keep 600 pieces myself so that I keep majority ownership and sell each remaining piece, or share, for $10. I have 400 of these to sell, $4000 worth.

At the IPO there are investors like yourself who look at my $10 a share offer. They think my company has potential to grow in the future and can see the value of these shares increasing in the future, so they buy a share.

The money from these initial investors gives me $4000 to open up many lemonade stands. It's important to note that from here onwards, any buying or selling of my lemonade stand shares doesn't come to my company anymore; I've made my money. If person A now buys one of these shares off person B, the one who profits is person B. Any company you invest in doesn't directly receive that money; rather, it goes to the person you're buying the share from.

Let's say one of the original investors in the lemonade stand is called Sally. Sally has one share of my lemonade stand. It's not something she physically owns but rather can be thought of like an online certificate. She bought the share from my IPO for $10 because she believes the value of the share will be up to $20 in five years.

Another investor called Rita comes into the picture. She thinks that the value of the lemonade stand is $20 a share already and offers to buy the share off Sally for $20. Sally is stoked, so she sells her share to Rita and profits $10.

Why would Rita do this? Well, she believes that the share is likely to be worth $30 in five years, so she doesn't mind paying a bit more.

Then another investor called Nancy comes into the scene. Nancy thinks the stock is actually worth $15, lower than what Rita has paid. Nancy offers to buy the lemonade stand stock off Rita for $15. Rita doesn't have to say yes, but the idea that she's holding onto something that she may have overpaid for scares Rita and causes her to panic‐sell it to Nancy. Nancy now owns the stock for $15 and Rita has lost $5 on her investment.

This buying and selling of my lemonade stock between investors is what the stock market is. That's it. (We get into more of the finer details, such as why stock prices move, in chapter 7.)

The stock market is just a facilitator that allows people to buy and sell shares amongst each other. It's like eBay, where on one side is someone trying to purchase the product and on the other side is the seller trying to sell the product, only in the stock market the ‘product’ is shares. It really is that simple. (If you'd like a more technical explanation, the stock market is a group of exchanges where the buying, selling and issuance of stocks — as in, creating stocks — occurs.)

I cannot even begin to explain to you how angry I got when I finally understood what the stock market was.

For so many years it came across as this big scary beast that was too technical for me to understand. And yet now a lecturer is telling me the stock market is just eBay for shares of companies? Are you freaking kidding me? Unfortunately, no jokes were being made. And to add injury to the insult, not everyone gets told the truth as early as I did. It frustrates me how many of us go around completely unaware of how simple the concepts of growing our wealth are, and how largely inaccessible this information has been.

Tulips and the world's first IPO

Long before Twitter went public, the world's first modern IPO occurred in March 1602. The company was the Dutch East India Company (or alternatively VOC, short for its Dutch name, Vereenigde Oost‐Indische Compagni). It was part of a movement of exploration around the world, and at the time, this company was worth more than some of today's largest companies, like Apple, Google and Facebook, combined. When you account for inflation, this company would be worth around $7 trillion in today's money.

They became very successful for spice trading in the Republic of Indonesia. The Dutch had a monopoly with their government that lasted over 20 years and helped keep them as an attractive option to investors — after all, when you see a government jump in to help a private company stay afloat, investors often assume the company is less likely to fail.

They decided they'd offer shares to the general public through the Amsterdam Stock Exchange to help fund their business, becoming the first publicly listed company to sell shares to retail investors (people like you and me). They raised 6.5 million guilders to then fund their explorations. It was a successful IPO to say the least.

I do want to take a moment to acknowledge that when we speak about history, we cannot erase the problems with explorations such as these. The Dutch East India Company also engaged in the trading of enslaved people and displacing African and Asian people as part of its business model. It was entirely unethical and inhumane, and had lasting effects on the economies and wealth of the countries they targeted.

The Dutch East India Company also played a huge role in the stock market's first economic bubble. A bubble, like the Dotcom Bubble mentioned in chapter 2, is when the price of something keeps getting higher and higher based on speculation, ultimately becoming unsustainable and quickly dropping in price. But the first bubble wasn't actually based around a single stock — it was about flowers. Tulips, to be exact.

I've never come across a bunch of tulips I haven't considered beautiful, but my feelings towards them pale in comparison to those of the Dutch in the sixteenth century. They were so prized that, at the peak of the bubble, some tulip bulbs were being sold for six times the average person's annual salary at the time.

It all began when tulips were imported into Europe from Turkey thanks to the spice trade routes. They were seen as a status symbol because they were so fragile. Originally only a prize for the wealthy, they quickly became popular among the middle class as well. All types of tulips were being traded, with multicoloured ones perceived as being even rarer and more valuable. By 1634 ‘Tulip Mania’, as it was called, had truly swept through the country.

It felt like the price of tulips could only go higher, and many people were making a pretty penny from buying and selling the flowers. The bubble became obvious when people started taking loans to buy tulips, as they were so confident that prices were only going higher and higher. Charles Mackay wrote in his book Extraordinary Popular Delusions and the Madness of Crowds that at one point 12 acres of land were offered for a single tulip bulb.

When accounting for inflation, tulips were selling for the equivalent of US$50 000 to as high as US$700 000 in today's market. It was madness. And of course, like all speculative bubbles, it eventually burst.

In three years' time many, unfortunately, found themselves holding stock of tulips that people were no longer interested in. It was a definite moment in the market, demonstrating how humans behave during a bubble, and it still holds as a reminder of how human behaviour can change when lured by the possibility of making a quick return.

When markets begin to rise unexpectedly in current times, you may notice people will start to reference Tulip Mania as a warning of a possible bubble forming again.

Bubbles are usually formed when people stop seeing the intrinsic value of a company or stock and instead get overwhelmed by the fear of missing out. It's a common phenomenon that will continue to occur in the market, but the investor in training is aware that when greed seeps in, the fundamentals of investing are often pushed to the side.

While the Amsterdam Stock Exchange was growing strong in the 1600s (and it’s still the oldest surviving stock exchange in the world), many others were beginning to form in the busiest cities around the world.

Stock exchanges = stock market? Not quite

A stock exchange is a location where stocks or shares are exchanged, i.e. bought and sold. There are many stock exchanges around the world, many in the most prominent cities of large countries. In fact, there are 60 exchanges worldwide. Out of these, 16 of them are extremely large, with the value of the companies listed on each of these large exchanges being over $1 trillion. These larger exchanges account for 87 per cent of the value of the global stock market and are all located in Asia, North America or Europe. That's probably a lot of words, so let me break it down.

Think of a stock exchange like a list. Most countries have just one list. It lists all the companies that you can buy stocks in. This lets you see how much the price of that company stock is and how much the price has changed since yesterday.

So how is the stock exchange or list different to the stock market? Well, the stock market can be made up of a number of exchanges. For example, the US stock market is made up of 13 US exchanges, such as their famous New York Stock Exchange or the NASDAQ exchange (see figure 4.1), whereas the global stock market is made up of all 60 exchanges in the world.

Back in the day, before stock exchanges existed, investors used to gather in person to discuss and exchange investments. Sometimes it would be at a coffee shop in London, or at a park in the US.

New York City was booming in the eighteenth century, and investors and brokers would often meet under a buttonwood tree to do deals. The tree was the most perfect spot, situated close to the financial district and banks. What was the name of the street the tree was located at? Wall Street.

Wall Street became home to the New York Stock Exchange (NYSE) in 1792, with 24 founding stockbrokers, where they fittingly named their contract the Buttonwood Agreement.

Initially, ownership of the exchange was extremely exclusive, and you could only obtain a membership by purchasing a seat from an existing member. The first company to be listed was the Bank of New York. The NYSE has now become one of the world's most famous stock exchanges, and to this date is still the biggest powerhouse in the stock market.

If you go to the NYSE today you'll see that, even though modern technology allows the average person to invest online, there are still traders that run around on the trading floor. We don't technically need human traders to execute deals or make trades anymore thanks to technology, however, keeping the trading floor open continues as a sort of tradition. It also provides news sources great visual content of panicked and stressed‐out traders for when the stock market drops slightly.

Remember that an exchange can be thought of as simply a list of companies. Companies are limited to the exchange that lists them. If you want to invest in British Petroleum you'd invest through the London Stock Exchange. If you want to invest in Samsung you'd go through the Korea Exchange. Whichever company you want, you have to find the exchange it comes from and go there.

Thankfully, gone are the days when you had to call brokers that worked on these exchanges in order to invest. (As a millennial who's petrified of phone calls, I hate to admit this was one of the barriers that stopped me from investing for a long time.)

Instead there are things called online brokers. We get into brokers in ‘Putting it all together’, but the main takeaway here is that stock exchanges hold the companies you're interested in, the stock market is made up of the exchanges and you invest in the stock market through brokers. Simple — see figure 4.2.

The stock market, though it appears complex and intricate, is really quite simple. The industry has done an amazing job at complicating it and using jargon to push people out. It reminds me a lot of the type of girl in high school who wouldn't tell you where she got her dress from. Except now you can take a photo of the dress and use an app to scan online clothing shops (or, in our case, read a book about investing and have it broken down for us). The beauty of this modern world is that the walls of secrecy built around industries are beginning to collapse, opening them up to everyday people who want to learn about how to build generational wealth. Now that these walls are falling, it's time to step in.