Clearing up the confusion.
People use the term “stock market” all the time, praising it when their investments are doing well and blaming it when things go wrong. But what actually is the stock market? Is it some mystical place where people yell “buy!” and “sell!” at each other all day? Let’s dig into the basics and separate fact from fiction about the market.
“Stock” is a term that refers to one share of ownership in a company. Say you buy one share of Apple – that one share represents that you are one of the owners of Apple. You may own one share out of many millions of Apple shares, but nonetheless each share you own grants you more and more ownership of the company.
There are other members of the public that may want to buy that share of Apple. As Apple makes more money and does better as a company, the value of your share will increase. But if Apple isn’t making much money or if the public thinks the company isn’t doing well, the value of your share may fall. These fluctuations in value occur all the time, so the value of your share may rise and fall daily based on the public’s perception of Apple.
Now let’s talk about the “stock market”. This term is generally used to describe the entire system of publicly traded stocks, of how they’re bought and sold across the country and the globe. Many stocks are bought and sold through stock “exchanges”, which are where you or your stock broker go to make this happen. The two biggest exchanges in the U.S. are the Nasdaq and the New York Stock Exchange (where they ring the opening bell). These exchanges are almost entirely electronic, though some still have a few people in a physical location yelling orders at each other.
So what’s a “stock broker”? A broker is who helps you buy and sell stocks. Brokers used to be individual people but nearly all brokers nowadays are electronic. Your account with a broker is called a brokerage account, which you use to tell your broker which stocks you want to buy and sell. The broker then follows your order and buys or sells the stock. Some common brokers are Fidelity, Charles Schwab, Vanguard, and E-trade. Each stock has a symbol associated with it, called a “ticker symbol”. For example, Apple’s ticker symbol is AAPL. So when you tell your broker to go buy Apple, you tell them to buy X number of shares of AAPL.
Stocks offer an opportunity to increase your initial investment while possibly providing passive income in the form of dividends. Companies pay dividends to entice investors to invest in their company, which can be a powerful tool for us investors by creating passive income while we pursue financial independence. In addition, stocks are often very “liquid”, meaning you can sell the stock at a moment’s notice if you need that money to use or invest elsewhere.
Now that we’ve cleared up the confusion about the market and its many mysteries, you should feel much more confident the next time you want to buy or sell stock!
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