The stock market’s ups and downs are always all over the news, but for most people, it’s all just a vague notion until they decide they actually want to get involved. If you are someone who is stock market curious, we understand because we were like you until we got into the game ourselves! So, let’s learn a bit about the basics today, and see what makes the whole thing tick, shall we?
Very simply put, stocks give an individual person a partial ownership in a publicly traded company. The units of stock you purchase are called shares, because you are sharing the company’s ownership with others. So, when you invest in shares you are giving the company some of your money to help them grow their profits, in the hopes that you, a shareholder, will eventually share in the wealth they accrue, too! Some companies pay you dividends, a small amount of money based on their ongoing profits, while other stocks you need to trade away in order to profit, selling them for more money than what you paid for them! Remember how we called it a game?
Common stock and preferred stock are the two primary categories of stocks. The ownership of common stock entitles shareholders to vote and participate in a range of business decisions. Preferred stock is a hands off approach in which you don’t directly participate in company decisions, but they typically pay out higher dividends so you can get more money out of your investment.
The network of stock exchanges that offer traders and investors the opportunity to buy and sell shares in publicly traded companies is what we refer to as the stock market. These companies that sell shares use a process called “IPO”, which stands for “initial public offering”. This process makes their shares available for purchase on the stock exchange. A private company that becomes listed on the stock exchange becomes a public company and is then able to sell its shares to investors and traders, while the exchange tracks changes in the stock’s price. The price is determined by the old principle of supply and demand, and whether or not the shareholders are willing to buy or sell.
To make things more interesting, there are two different kinds of markets! The primary market is for shares created by the IPO process, and are publicly available. The secondary market, which is actually the stock exchange, is where those shares are traded, and thousands of trades happen every single day!
There are two purposes for the stock market. First, it helps companies raise money, which is called capital, by providing them with a platform where they can offer their shares to the public by making a “public offering”, and use the money gained to expand their business and make more profits. Secondly, it allows the investor who purchased the stocks a chance to share in those profits, so both parties are able to prosper.
The stock market offers a wonderful opportunity for companies and their investors to make money, a win-win situation! With a little luck and a lot of skill, you can play the stock market game and be a winner, too!
