The stock market allows people and businesses to buy and sell stocks.
The stock market is not one location or has a physical location. When you hear someone talk about the stock market, they are talking about how stocks as a whole are performing.
The stock market is a summary of the thousands of stocks that are traded on stock exchanges.
To better understand how the stock market is performing, many people reference the S&P 500.
The S&P 500 (Standard and Poor’s 500) tracks the value of the 500 largest companies in the US.
If you hear the stock market is going up, that means most stocks are going up in price. If you hear the stock market is going down, that means most stocks are going down in price.
A few factors determine if the stock market is up or down but generally speaking, the price has a big impact on the stock market.
When someone wants to invest in the stock market and buy stock, it’s purchased through a stock exchange.
We will talk more about stock exchanges later on.
History of the Stock Market
The first stock ever sold was in 1602 by the Dutch East India Company. That was more than 400 years ago so stocks have been around for a long time.
As more and more companies started issuing (selling) stock, the stock market was born.
Instead of going to different companies to purchase their stock, you could go to one location called a stock exchange.
Today, there are many stock market exchanges around the world.
Two of the largest stock exchanges in the United States are the NYSE and the NASDAQ.
The NYSE (New York Stock Exchange) is in New York City. It is the largest stock exchange in the world!
Have you ever seen guys (and a few ladies) wearing vests, paper everywhere, shouting at each other? You are most likely seeing pictures of stockbrokers on the NYSE floor.
The NASDAQ is different from the NYSE. The NASDAQ is an electronic exchange where all trading is done online.
Also, the NASDAQ stock exchange mainly lists technology companies like Apple, Netflix, and Tesla.
You can Google any company and see what stock exchange they are listed on.
Here are a few examples:
If you Google a company and don’t see a chart like the images above. That means the company is not publicly traded and does not issue (sell) stock.
If you wanted to invest in Netflix or Tesla stock, you wouldn’t go to NASDAQ’s website to do so. You will learn later on how to buy and sell stock.
How the Stock Market Works
When you think of a market, what do you think of?
Do you think of a farmers market or maybe a supermarket?
And what happens at the supermarket? People buy, and sometimes return, products companies are selling. Right?
What happens in the stock market? The same thing! Selling and buying of products. In the stock market, these products are called financial securities. A stock is a financial security.
Remember that the stock market is not one location. The stock market represents the stocks that are bought and sold in stock exchanges like the NYSE or NASDAQ.
Although the market is called the stock market, other financial securities are part of the stock market. They include:
- Corporate Bonds
- ETFs (Exchange Traded Funds)
The stock market is simple when you understand the basics. It can be easy to get confused when someone from the financial industry tries to describe the stock market but don’t let that overwhelm you.
What Is a Stock?
A stock is a type of investment.
When you buy stock, you invest your money in a company in hopes it will grow and you can profit from the investment.
Stock is something a company offers the public (people and businesses) when they need money. They need our money to grow their company. If they had all the money in the world, they probably wouldn’t go public and sell their stock.
When you buy stock, you represent an ownership position in the company.
You might ask, “What’s an ownership position?”
First, it does not mean you own the entire company.
It means you own a small (most likely very small) share of the company’s profits.
You own a small share because out of the millions of shares, you most likely own a handful or just one. If you hear someone in the news say equity or equities, it’s the same thing as a stock or shares.
The financial industry tries to make it a little confusing for us.
If you want to learn more, check out, What Is a Stock.
How Do Companies Issue Stock?
If a company wants to issue (sell) stock to the public, it must meet specific requirements.
The requirements are established by a government agency called the SEC (Securities and Exchange Commission).
If a company successfully goes through the SEC process, its stock is issued to the public via an IPO (Initial Public Offering).
When a company issues stock, it becomes a publicly-traded company. Not all companies want to become publicly traded and issue stock.
When a company becomes publicly traded, it must share its information with the public. That information includes how much money they make, how much it costs to make their products and even leadership’s compensation.
Many companies decided to go public and issue stock.
For example; Target, Apple, Shell, AT&T, and Tesla are examples of public companies.
Remember that the purpose of becoming a public company and issuing stock is because the company needs money, your money, to grow.
For example, when Facebook went public and issued stock in 2012, its IPO (Initial Public Offering) price was $38. They sold 421 million shares and made $16 billion.
Facebook made A LOT of money when they decided to go public.
If you want to buy stock from a company but can’t find its stock, it’s because the company is not publicly traded.
Examples of popular companies that are not public are; Menards, Staples, PetSmart, and Airbnb.
How Do You Invest In The Stock Market?
How do you buy stocks that are listed on the NYSE or NASDAQ?
The good news. You don’t have to work for an investment company or become a financial professional to buy stock.
Let’s say you want to buy a stock of Netflix. Netflix is listed on the NASDAQ stock exchange.
First, you don’t go to NASDAQ’s website and buy stock. Stock can be purchased through brokerage accounts or your retirement plan. There are a lot of brokerage companies.
I recommend purchasing individual stocks with a brokerage company that doesn’t charge a commission.
Companies like Robinhood and Vanguard don’t charge a commission. If you purchase stock, it’s because you believe the company will do well, become successful, and ultimately go up in value and price.
If you decide to sell your stock for whatever reason (you think the price will go down or you need the money), the money you get back is whatever the price is the day you sell it.
Keep in mind that you are taxed on your earnings when you sell stock.
Stock Market Performance
Overall, the stock market has performed extraordinarily well.
If you go back a hundred years and see the performance on a chart, you’ll see a line continue to go up.
Here’s the S&P 500 as of February 18, 2022:
The S&P 500 does not represent the entire stock market but it does provide a summary of how it’s performing as a whole.
The S&P 500 is a market index which means it tracks only certain companies. The S&P 500 (Standard and Poor’s 500) tracks the value of the 500 largest companies in the US.
Another market index is the Dow 30.
The Dow 30 (Dow Jones Industrial Average) tracks the value of the 30 largest companies in the US.
Either of these indexes will help you understand how the stock market as a whole is performing.
If the S&P 500 is up, that means the stock market is going up. If it’s down, that means the stock market is going down.
As you can see from the chart above. The stock market as a whole continues to go up.
There are times however when the stock market does not perform well. There are years like in 2008 when the stock market went down a lot.
At the start of the COVID-19 pandemic, the stock market was significantly down. However, after about a year, it went up and was higher than before the pandemic.
Nobody can predict when the next stock market crash is going to be, which is why it’s best to think long term and keep your money invested for the long run.
The best investors like Warren Buffet will tell you not to look at these indexes (S&P 500 and Dow 30) every day.
Look at them every few months or even once a year.
If you are an investor, you don’t care what happens to the price every hour of every day. You care what happens 10, 20, or 30 years down the road.
What Is the Stock Market Summary
We’ve covered a lot here; many new acronyms, dates, and names. My goal is to help you understand the stock market and how it works.
Here’s a summary of what you learned:
- The stock market allows people and businesses to buy and sell stocks.
- The stock market is not one location or has a physical location.
- The stock market is a summary of the thousands of stocks that are traded on stock exchanges.
- Stock exchanges are where stocks and other financial securities are listed.
- Stock exchanges include the NYSE and NASDAQ.
If you want to start buying stocks, you need to:
- Understand the basics and therefore know what questions to ask.
- Find a Registered Investment Advisor (RIA). They are professionals.
I hope this has helped you understand the stock market!
If you’re ready to invest in the stock market. Remember to research the company and work with professionals like a RIA (Registered Investment Advisor) who can guide you to make the best choices.