Hi everyone!
After our recent article on what the S&P 500 is, a few great questions came up, in particular:
What exactly is the stock market?
Don’t worry, after reading today’s article, you’ll definitely understand much better. At first, the term “stock market” may seem confusing. But once you break it down into two parts, it’s way easier to understand than you think.
What Is a Stock?
A stock is simply a tiny piece of ownership in a company.
So if you buy 100 shares of any given company, you now own 100 small portions of said company. That’s it!
Additionally, the word “shares ” simply refers to the quantity of pieces you own, and “stock ” refers to the company ownership itself. If someone says they have 100 shares of Apple stock, all they mean is they own 100 tiny pieces of Apple.
What Is the Stock Market?
Now let’s talk about the “market” part.
A market or marketplace is just a place where people buy and sell things, in this case, stocks. So, the stock market is a place (or more accurately, a digital system) where people buy and sell ownership pieces of companies.
When people say “the stock market,” they’re usually referring to the major U.S. stock exchanges like:
- The New York Stock Exchange (NYSE)
- NASDAQ
- The S&P 500 Index
- The Dow Jones Industrial Average (DJIA)
These are all tools to measure and track how groups of companies are doing, kind of like a scorecard for big business. So when the indices go up, it often correlates with the economy also going up; however, this relationship is not exactly direct, but rather tends to move in loosely the same direction.
I found it quite interesting that before the widely adopted use of the internet, physical paper stock certificates were used. And so before the 1990’s that was truly the only way to prove you owned said stock. Isn’t it crazy how much the internet has changed?!
How A company Goes Public
Before a company can sell stock to the public, it goes through something called an IPO, or Initial Public Offering.
Here’s what that means:
When a company decides it wants to raise money and grow, it can “go public” by listing its shares on the stock market. This process is the IPO. It allows regular people (like you and me!) to invest in the company for the first time. Often this goes through either the New York Stock Exchange or NASDAQ.
After the IPO, shares can be bought and sold on public exchanges, which is how people trade stocks every day.
Market Cap: What’s a Company Worth?
Companies choose how many shares they want to create. For example, Apple is divided into approximately 15 billion shares. (I know, crazy)
If one Apple share costs around $200, and you multiply that by all the shares out there, you get Apple’s market cap, aka. how much the company is worth overall. This means today Apple’s market cap is approximately $3.2 trillion.
It’s a simple but powerful way to see how valuable a company is compared to others.
How About Earnings
A company’s earnings are like a report card that comes out every three months (quarterly). These earnings reports show if the company made a profit or lost money, and that often affects whether its stock price goes up or down.
Investors keep a close eye on these reports because they help predict how a company will perform in the future. These are available to the public because of the FOIA (Freedom of Information Act). They can be found at the Securities and Exchange Commission’s EDGAR program. For example, if a company’s gross income is smaller this year than the previous year, buyers may be wary. They might think the company isn’t doing so well.
Sectors: Not All Stocks Are the Same
All public companies fall into 11 different sectors based on what they do. These include:
- Healthcare
- Technology
- Consumer goods
- Financials
- Real estate
…and more.
Understanding sectors can help you diversify your investments and see which industries are thriving. It’s always a good idea not to be completely set on one sector, but rather to have bits and pieces of each.
P.S. — We’ll be doing a full post soon explaining all 11 sectors!
What’s in the S&P 500?
As mentioned before, the S&P 500 tracks the top 500 companies in the U.S. economy. But companies don’t stay in the index forever; they must meet certain requirements and perform well. That means new companies are constantly joining, and others are kicked out.
If a company’s value drops or it underperforms, it can be replaced by another rising star. It’s a competitive list and a good way to follow the overall health of the economy.
Final Thoughts
The stock market is truly a lot simpler than it’s made out to be, and it’s a place where anyone can buy shares and become a part of a business’s journey, even if you only buy one share!
Start by understanding the basics, and over time, these terms will become second nature. You’ve got this!
Comments!
Did you find this helpful? What questions do you still have about the stock market or stocks and shares? Leave us a comment if there is something you want to see specifically for the following weeks!
Until next time,
Sophia