Let me paint a picture for you that, if you are like me, you have probably experienced in your life:
You are sitting on your couch browsing your phone or television when you see a headline come up, “New Record High For Stock Market and S&P 500”. Obviously, you know that this means good news. Who doesn’t love a new record high? But, what does it really mean? You know the stock market is important and that it has something to do with people’s money. However, if you are being honest with yourself, you are not exactly confident in your ability to define what stocks and the overall stock market actually are.
I remember distinctly being in this position in high school. No one ever taught me what the stock market was, or why it was important. All I knew is that when things went up that was good, and when things went down (I’m looking at you, 2008) virtually no one was happy. However, the good news is that understanding stocks and the overall market is really not as scary as it might seem.
To put it simply, a stock (sometimes called a share or equity) is a small piece of a company that anyone can own. As an owner of a stock you are also a partial owner of the company you just bought stock for. When the value of the company you have bought into rises or falls, so does the value of the stock you own. These stocks can be bought and subsequently sold at the discretion of the owner of the stock. Thus, the stock market represents the culmination of all the stocks that are bought, sold, and owned that are currently traded by the public through various stock exchanges. Stock exchanges are entities where stocks are bought and sold. Here in the U.S., the major exchanges that most stocks are bought and sold through are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation (NASDAQ).
Generally, stocks are viewed as a more risky investment option compared to other investment options like bonds. However, many people are attracted to stocks due to their risky nature since this risk often yields a higher reward for the owner of the stocks. While many companies offer stock to be purchased, only companies that are publicly traded can actually be invested in through this manner. This means that a company that is publicly traded can receive funds through the general public, whereas a private company must raise funds internally or through private investors. While there are numerous reasons why the value of a stock may rise or fall, some common factors that influence their value are a company’s overall earnings, internal developments, performance of products and services, and even external events such as a change in political power. Some stocks also pay what are called dividends to the owners of the stock, which are paid regularly by a company to all of its stockholders out of its profits. Typically, when a company pays a dividend they are doing it to send a signal to the overall public about their feelings about the future of the company. Along with this, depending on one’s strategy, some investors may seek out dividend paying stocks and some may not.
While stocks are simply one piece of the pie when looking at the financial sector as a whole, they are an extremely important one. Understanding the basics of what stocks are, how they work, and the role they play in everyday society is a great way to begin diving deeper into the financial world. We may dive deeper into various other investment methods in the future. However, understanding the basics of stocks is imperative to building one’s overall knowledge of the financial sector of the world.
By: Daniel Trentham, Marketing Coordinator at CROFT & FROST