Name: What is the stock market and how does it work? | BBC News
Uploaded: 2025-06-05T02:23:49.000Z
Duration: 13 min 59 s
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Joining me now is the BBC's business editor Simon Jack and Laura Davison, political editor from Bloomberg News.

Laura, Simon, thank you very much indeed for being with us.

Obviously we're seeing the turmoil on the markets continue today, Monday.

Simon, just in terms of understanding the basics here, can you explain to us how a stock market index works?

Okay, so if we were to take our own stock market index, the biggest one, which is the FTSE 100, 100 biggest companies publicly listed in the UK, they were all put in a big bucket back in 1984 and given a certain weighting in that bucket depending on how big those companies were, and it was set at a level of 1,000 back in 1984.

Now since then companies come, companies have gone, there's been takeovers and mergers, but generally speaking there's been 100 of the biggest companies and basically the stock market is a reflection of their sort of total value over time.

The bigger the company, the more weight it has in the index, same in the US.

So you'll see, for example, an AstraZeneca or an HSBC has more weight than others, and in the US you've seen the S&P 500, which is the 500 biggest companies, you've seen enormous concentration in some names like Apple, Nvidia, et cetera, Amazon, what have you.

And so what the stock market tells you is generally the direction of travel of most of the shares and the value of the shares in those companies with a concentration on those biggest names.

And a lot of people say one of the problems with the US stock market in recent years is those few big tech companies have had an overweening influence on the whole thing.

But generally speaking it's an indication of what some of our biggest companies are worth and whether they get up or down tells you something about the sentiment of whether you think that their profits are going to rise or fall in the future.

And Laura, obviously we're seeing the falls continue today.

And when we talk about a correction, can you explain what that means in practice?

How much are companies, political leaders waiting to see whether there's a negotiated deal?

Because everyone's, I guess, wondering where the bottom is, where the level might lie at, and whether the market will recover.

Yeah, so that is really the unknown question right now.

About $5 trillion has been zapped from markets.

And we are waiting for markets in the US to open here in just about an hour and a half.

We'll get a sense of where things are headed.

There's a meeting today, later today, with Netanyahu at the White House with President Trump.

And there's a question of will there be some sort of relief from tariffs that will be announced there.

We got a little bit of a sense of how markets are reacting.

On Friday, when Trump said he had spoken with the Vietnamese and that the US officials had spoken with Vietnamese officials, and there was potentially a deal in the works for Vietnam, which has been hit with this 46% tariff by the US, which is quite a significant level, that they would reduce to zero all of their tariffs on US goods going into that country.

We saw as a reaction, stocks like Nike and Lululemon actually increased on that news because these are apparel makers that have a very big presence there.

So each, broadly, I believe we're going to see markets down.

But you could see particular stocks, particular things moving in a more positive direction as there's indications that there may be some exemptions that are allowed.

We don't know that Trump will allow that.

He sent some mixed signals at times that his policies will never change, but then also suggesting that some deals are possible.

And just before I start looking at some of today's reaction over the weekend, Simon, to relate this to all of us, what happens if stocks continue to fall for our pension funds or for other aspects of daily life?

Okay, I think there are two things to stress here.

What happens in stock markets is not necessarily the same thing that happens in the economy.

They can be linked, but they're not exactly the same.

Some people invest directly in shares, and this will definitely affect them.

These are some big falls, some of the biggest falls we've seen in a couple of days since pandemic panic gripped the markets back in 2020.

The other way that people are exposed to this is through their pension funds.

Now, pension fund investing is a long-term game.

Not all of your money will go into shares.

Some of it will go into government bonds.

And the bonds are the less this will affect you.

There are also two types of pension, a defined benefit pension, where you get a price promise, a percentage of your salary in retirement, and there's defined contribution, where your pension pot's value will rise and fall with financial markets.

But I think that this is a long-term game, pension investing.

We've seen things like this before a few years ago during the pandemic.

I think what's more important, the warning sign flashing here is not about the value of your pension.

It's about the economies in which we all live and work.

And a lot of people saying that the chances of a recession, both in the US, UK, and even globally, have definitely gone up a notch since then.

And that has implications for things like jobs and wages.

Okay, we'll come back to define a recession in a moment, maybe.

But, Laura, just let me bring a little bit of the reaction that we've had today, which raises another couple of questions.

Because economy ministers from across the European Union are meeting in Luxembourg to discuss a response to the US tariffs.

Let me just play you a brief clip of the German economics minister, Robert Habeck, responding to a question about how Donald Trump came to those calculations, those original figures, for how he is imposing these taxes and tariffs.

The calculations, from my point of view, are nonsense.

Even the basis of the calculation is nonsense.

Yes, the assumption that a trade budget surplus or deficit is a problem in itself is a wrong estimation.

Because in the end, globalization serves all economies, and especially the American economy has huge growth figures in GDP, better than a lot of European countries.

So you see, if we, the rest of the world, are selling cheaper goods to the American economy, it's of use of the American economy.

So even the basis of the calculation, how shall I put it, economical philosophical basis is nonsense.

And then we have seen that these, the countries who try to ease the conflicts beforehand with the US and hoped for a are wrong.

So I can only say to the European partners, we have to stay united.

If you try to solve the problem on your own, this will not be successful.

So Laura, the basis of that original calculation and some of the assumptions politically, even economically, that lie behind it, what would you say to that clip that we just heard?

Yeah, so what the White House did in determining all of these rates, originally Trump has talked about these as reciprocal tariffs, that the White House was going to add up all of the tariff and trade barriers that certain countries charge on US goods going in, and they would basically hit back with that same level.

That's actually a very complicated calculation to do.

Instead, they looked at essentially what the trade deficit is between the US and that country.

Trump for years, literally going back four decades, has been very perturbed by the idea of trade deficits.

And he wants to see more manufacturing in the US, more goods going abroad, and that there's essentially equal trade between the US and other countries.

Of course, it's a very difficult thing to achieve.

The US is a very consumer-driven economy.

And a lot of manufacturing of things that people use every day, things like clothes, toys, shoes, household wares, are pretty much exclusively made overseas, not to mention things that can't be grown, like bananas or other products that people eat, coffee.

So this is really at the crux of the issue and the economic conundrum that we find ourselves in, is that Trump does not like trade deficits.

And that's what we've seen underlying these tariffs.

This has been something he has railed against ever since well before he was into politics.

This is an idea that he's been thinking about for a long time during his first term.

He imposed some tariffs, but they were a lot more narrow in scope and size, and you didn't see quite the market impact that you saw here.

And he has a different set of advisors around him that are much more willing to go along with these policies.

We saw a lot of pushback from his first-term advisors.

Let me just bring in a little bit of that, because in an interesting set of events, the American billionaire Bill Ackman, who endorsed President Trump last year, has posted himself saying that the US leader was losing the confidence of business leaders and should pause his trade war.

He posted on Next saying, the president has an opportunity to call a 90-day timeout.

And he warns, if we launch economic nuclear war on every country in the world, business investment will grind to a halt, consumers will close their wallets and pocketbooks, and we will severely damage our reputation with the rest of the world.

Simon, I mean, it's interesting, isn't it, to hear some of those who have spoken in favour of Trump now saying this?

And also, Bill Ackman was very critical of Howard Lutnick, the economic secretary, saying that Howard Lutnick's firm was heavily invested in government bonds, which actually, in a time like this, do pretty well, because there's a run for safe haven.

I had an interview with the vice chair of Goldman Sachs a few weeks ago.

And that was when we were in this on-again, off-again Trump terrorist thing with Mexico and Canada.

He said, if you're a chief executive of a major company, you don't know what to do right now.

You don't know whether I'm not going to buy a company, I'm not going to open a factory, I don't know where to do this, I don't know where to do that, because there's so much flux.

And that is actually impacting business confidence, so they will invest less, they'll hire fewer people.

And that applies to the US as well as others.