Stock Market 101: What Is The Stock Market

The stock market drives the american economy.  Whether you know it or not, odds are you are already invested in the stock market.  Whether you have purchased individual stocks from a broker or have a 401K plan, youbprobably have some fraction of your money invested in the stock market at any given point in your life.

What Are Stocks?

Everyone seems to have some sort if idea about what stocks and shares are.  A stock or share represents ownership in a company.  when you see stocks bought and sold on the stock market, you are seeing people buy or sell their piece of ownership in those companies.  The stock price of a company is the current market price for a single share of that company.  Every minute thousands of shares are bought and sold – or traded – on a stock exchange.  Two popular stock exchanges would be the New York Stock Exchange (NYSE) or the NASDAQ.  Buyers put in a bid price – the price they are willing to buy the stock for.  The askers put in the ask price – the price they’re willing to buy the stock for.

When buying or selling stocks you can put in your bid price – or the price YOU are willing to pay to buy the stock. Sellers put in the ask and only when the bid and ask meet does the trade happen.  This ensures you always get the price you are comfortable with.

Key Stock Market Terms

Market Volume – the number of shares of a stock traded in a given time period (typically the day)

Market Capitalization – the total value of the company (stock price * outstanding shares)

Day Range – The lowest and highest price the stock has traded for during that day

52-Week Range – the lowest and highest price the stock has traded for during the past 52 weeks

Why Do People Invest In Stocks?

Just like buying any goods that rise and fall in price, it allows you to make money and capital gains.  What differentiates stocks from other kinds of assets is that companies generate earnings.  Companies make goods and provide services that generate revenue which hopefully generate profits.  Other assets like gold do not generate revenue, but merely maintain a value over time or increase or decrease.

Companies take on risk in generating their profits.  People who own stock in those companies are taking part in this rick in hopes to making money.  This is known as a “Risk Premium”.

Stocks Provide a Greater ROI

Compared to stocks, all other asset types do not typically generate as much money, however stocks are definitely more volatile.  The amount of money you can make on stocks is an important reason on why stocks should be a part of you portfolio.