What is the stock market? A guide for beginners

Let's first mention what 'investing' means. Investing just means putting your money to work by buying stocks, shares or assets with the aim to hopefully gain money over time. But of course you can also lose money when investing. One thing you can invest in is the stock market.

What is the stock market?

A stock market is basically like a big supermarket where you as an investor can shop for and purchase or sell shares. So it's a bit like a supermarket where you can exchange money for a tiny part of a company. Firstly, it's useful to be aware of the words stocks and shares when talking about the stock market and what these mean. The word stocks and shares are often used interchangeably but just for reference a share is a proportion of ownership in a company and stocks are a collection of shares in one company or a number of different companies.

So why would companies want to sell portions of their company on the stock market to anyone who is interested in investing?

Companies can go public and basically give investors (which can be everyday people like me and you) the option to buy shares in their company so that they can get more money pumped into their business to allow them to grow and in return the investor will gain money back if the company does well and profits grow ie your share in that company becomes more valuable.

Now originally when a company goes public in order to gain money they can offer the public a chance to invest in the business. This happens through an IPO (initial public offering) where investor pay a certain amount of money to own a small amount of the company - called a share. The company can then decide to pay some of the profits back to the people who invested in the company through dividends - this is good because people are more likely to buy that stock. People that didn't originally buy a share of this company can still buy a share off someone that did but if the company is doing well, the share will cost more than it did originally. This buying and selling is what the stock market is. So investor could make money through pay outs called dividends or by selling their stocks at a higher price than what they bought it for.

Index funds:

There are stock markets everywhere, all over the world but the biggest most known one is the NYSE (New York Stock Exchange).

You can invest in an individual company and pick yourself which companies you wish to invest in and build up a portfolio that way so you could decide you want to put $100 dollars into Tesla and $200 into Microsoft or you could opt to invest in an what is called an index fund if perhaps you don't want to do much research of your own. An index fund is an investment that tracks a particular market index. The index fund you pick to invest in will track all the companies within that index so put simply if you invest in a index fund you are investing in all the companies included in this index which is basically a collection of pre chosen shares in various companies. Now there are many index funds out there, many country specific (it's worth noting you don't have to be a US citizen to invest in the US index funds for example). That may sound a bit confusing but it's easier if you think of an example of an index fund. If you were to invest in the S&P 500 index fund for example, you'd be investing in a portfolio of americas top 500 companies like Amazon, Tesla, Facebook and so on. Index funds are good for beginners because you don't need to actively manage them, they allow broad diversification and their performance tends to be quite predictable and stable.

So as we've said the stock market is a place where stocks are exchanged. So why does the stock market prices change?

This is because prices of companies can change depending on many factors. For example, if a CEO of a big company has done something controversial or theres been a big scandal then the share prices of a company can plumpet. It doesn't really matter if the story is true or false, if theres something bad in the news, quite often shareholders/investors will sell their shares and this will drive the price down. You can easily check what a particular index fund is doing or what a certain stock is doing. For example, you can google 'S&P 500' and then you can see how this index fund has been performing and its price at a given time.

I'm going to leave this post here as I wanted this only to be an overview and nothing too in depth.

Thank you for reading,

Hayley