What is the Stock Market?
The stock market is where investors go to buy and sell publicly traded investments—shares in companies and funds—with each other.
Shares of companies and funds are represented by a stock ticker and trade for prices that are quoted by stock exchanges. Each share is a token representing a piece of a larger asset that is being valued by the market price.
Every stock that is available on the market is referred to as a publicly traded financial asset and has gone public through some kind of initial public offering (IPO) process.
Companies or funds that are private are not accessible for purchase on the stock market.
Think of the stock market like a big auction house where participants come five days a week to buy and sell different items.
Buyers indicate the prices they are willing to buy individual stocks for, and sellers indicate the prices they are willing to sell those same stocks for.
If the buyers and sellers come to an agreement, then a transaction occurs.
In the old days, the stock market was a physical place where people bought and sold stocks from each other in person by yelling out the prices they were willing to buy or sell at.
Today, virtually all trading in the stock market occurs electronically.
The Stock Market: Individual Stocks vs. Funds
Stock market exchanges facilitate trading in shares of both individual stocks and funds.
Although individual stocks and funds can both trade on the stock market, they represent different types of investments.
An individual stock represents a minority ownership interest in a company. If a company has 100 shares of stock, then each share represents 1 percent of the company, and if you buy 10 shares, you own 10 percent of the company.
In the real world, companies tend to have millions or even billions of shares (so it will take buying more than just a few shares to accumulate a large ownership!).
The price a company’s stock is simply the overall value of the company divided by the number of shares.
So if a company is worth $1,000 and it has 100 shares outstanding, then each share is worth $10. The number of shares is totally arbitrary. There are no rules that say a company needs to have 1,000 or 1,000,000 shares.
Share price should be considered alongside total market capitalization, which can be calculated by multiplying the share price by the total shares outstanding.
A fund is a pooled vehicle that collects investment from many investors to make investments in financial assets such as stocks, bonds, or real estate.
There are many different types of funds that can be traded on the open market, including exchange-traded funds, index funds, and mutual funds.
Each fund can have a wide variety of investment goals and methods. Funds are professionally managed by an asset management company and charge a fee for the service of investing the capital given to them.
The Stock Market Average
The stock market average represents the overall performance of the stock market and is typically indicated by referring to a widely followed stock market index.
When the media reports that a major stock market average has gone up or down, it is an indication that the overall value of the stocks in that index have appreciated or depreciated.
The stock market average is a good indication of whether stocks as a whole are increasing in value or decreasing in value.
For example, the S&P 500 consists of the 500 largest stocks (as measured by total market cap) in the United States. When the S&P 500 goes up, this generally translates to American stocks as a whole increasing in value.