What is the stock market?
If you break down the two words you come to a pretty simple definition of what the stock market is. A stock is a small share of ownership in a company. Stocks are measured in shares. For example, one could say they own 100 shares of Apple (AAPL) stock. This literally means that they are a partial owner in the company. Because most companies have millions of shares available, owning 100 shares, or even 1000 shares, is still only a tiny portion of the company. Millions of people buy stock and trade it every single day.
A market is a place where people buy and sell things. So a stock market is a place where people that own stocks in companies, and people that want to own stocks in those companies can find each other and conduct their transactions. While there is an actual physical place where this sometimes takes place, nowadays this is typically done online through an online broker in a matter of milliseconds. These brokers charge anywhere from free to hundreds of dollars to act as the middle man in the market. Most of them buy and sell stock and trade thousands of companies shares a day.
What do shareholders get out of stock and trade activities?
There are essentially two reasons a person or institution would buy a stock. The most common reason for an individual is in the hopes that the price of a share of stock will go up over a period of time, and they will be able to sell their shares of stock for more than they bought it for. They can then pocket the difference. Our lessons will focus on this type of buying.
Stock prices are usually shown in graphs, with the value of the stock on the y-axis (vertical axis) and a certain period of time on the x-axis (the horizontal axis). As shown in the example to the right, the price of a stock changes constantly, even in a single day. Some people like to buy and sell the same stock in the matter of a few minutes to try and capitalize on these daily changes, other traders choose to purchase stock for the long term and hold it. See our “What Type of Investor am I” page to find out what is best for your situation.
Risk verse Return
One of the fundamental ideas of the stock market is that of risk and return. You are purchasing shares of a company that you do not control. There is no one that is guaranteeing that those shares will be worth more at some future time. In fact there is always a small chance that those shares will be completely worthless sometime in the future if the companies leadership make bad decisions or the market changes.
This means that investing in the stock market can involve risk. The larger the potential reward, the greater the risk that is usually associated with it. If you purchase shares in a pharmaceutical company that is in the beginning stages of attempting to make a miracle drug that will cure cancer, then your reward will be astronomical if they succeed. Conversely if they fail for whatever reason then you will likely lose most of your money. You took a high risk at the opportunity of getting a high reward.
There are many ways you will learn to minimize the risks and maximize reward. Investing always has risks though. If you look at the average savings account return on investment vs the average stock market return on investment you will find that those that put their money in the stock market over the long term almost always made more money. This is because a savings account offers a guaranteed rate and no potential for losses.
You may have heard the saying, “No one ever became a millionaires putting their money into a savings account”. This is likely a very true statement. Wealthy people take the time to learn and make sound investments that return big money in the long run.