[Quora]How can you explain the concept of stock market to a 7 year old?

Wow, this should be interesting.

Let’s assume seven year old Tom, a rather enterprising fellow that he is, wants to open a lemonade shop. The shop will run all through summer break( Around 60 days). Now he needs 100$ to buy the lemons, the ice, a small table and chair and a colourful canopy. But investing 100$ is kind of risky. So he goes to his classmates, and offers them a part of what he makes if they all chip in 1 $. Everyone who has chipped in the dollar gets a ticket- a share if you may.

 

The daily profit that Tom makes, will now be split into 100 parts, and each of his classmates will get 1/100th of the profit. The value of the ticket they hold therefore, will be equal to the the sum of these 1/100th amounts for all the subsequent days when his lemonade shop is working.(Neglecting time value of money.)

Now, if Tom makes a 20$ profit on his first day at work, each of his classmates will get 20 cents. Since his shop will be running for 60 days, they are bound to get a lot more(60*0.2=12$) than what they had invested. Now all his classmates want to buy more tickets at 1$ since they are hoping to get 12, and the value of each ticket begins to increase. Now, seeing Tom’s grand success Rita also starts a shop along the same street corner. Rita makes way better lemonades , and Tom’s profits slowly start falling. This causes a panic among the ones who have bought Tom’s ticket, wanting to sell it off while it is still high.

And the show, as they say, goes on…

From my Quora answer

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