Stock Market Crisis 2008
What Does All of this Mean to the Average American?
If you pay attention to the news you’ve heard a lot about the stock market lately. Unless you read financial magazines everyday or keep up with the stock market, this all may be hard to understand. Here is the basic breakdown of what’s going on. First we’ll start with a few key terms!
What is a stock? The smallest unit of ownership in a company that gives you the right to vote on members of the company’s board of directors and other important matters. By owning a share of a company’s stock you also own a part of the company. Besides making decisions and owning part of the company you can also benefit from stocks appreciating in value. When you’re stock appreciates in value that means your dividend is higher. The higher the dividend, the more money you stand to gain. A dividend is simply a payment made by the corporation to you, the shareholder.
What is the stock market? The stock market is where stocks are traded.
What is the Dow Jones? The Dow Jones is an index that gauges the performance of 30 of the largest public companies in the US stock markets.
What is the Federal Reserve? Also known as The Fed, it is the bank for other banks including the federal government. The Federal Reserve is important because they are responsible for keeping interest rates low, maintaining employment, regulating banks to make sure your money is in a safe place, and they are the ones that distribute money to the nation’s banks.
So what just happened? 3 of the top 5 Wall Street institutions, Bear Stearns, Lehman Brothers, and Merrill Lynch have been sold or completely collapsed. At the time of this post we are awaiting word on a few other institutions including the insurance giant, AIG. The roles of these institutions are to provide financial services such as investment banking, insurance, asset management, and other financial services to capital markets which includes the stock market.
How did this crisis happen? Some say greed and some blame it on subprime mortgage loans. These loans are awarded to individuals with less than perfect credit history. The problem with subprime lending occurs when the price of that home goes down and homeowners are unable to afford their payments and their home goes into foreclosure. When this happened lenders like Fannie Mae and Freddie Mac could no longer sell their loan packages to investors so they lowered the qualifications, which led to subprime lending. This huge mistake led to Fannie and Freddie losing a substantial amount of money which meant banks, insurance companies, and investment firms also lost. Since these companies are traded on the stock market lots of people worldwide are tied into this so our government is trying to keep us from going into another great depression by purchasing a few of these companies that went under.
Is this like the Great Depression of 1929 or Black Monday 1987? No. Click on either link to learn more about these two events.
What does this mean for you?
• If you did business will Merrill Lynch you’ll simply be calling Bank of America home from now on.
• If you had a brokerage account with Lehman Brothers, your account is protected because the government insures up to $500,000. This means you can hold on to your investment and move it to another institution. Anything over $500,000 could be a loss.
• Loans will be hard to obtain at the moment because banks are hesitant to lend money for auto and home loans. Car dealers and real estate agents will probably feel the effects throughout the rest of this year.
• If you have a 401(k) or your retirement savings are in stocks, the value of your savings may have dropped in the past few days. Check with your financial institution.
• This does not affect your money at your local commercial bank.
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