When the stock market comes up in conversation, it is usually accompanied by jargon. The repeated use of technical words such as margin and volume makes the stock market seem super complicated and can put people off learning about it, especially an easily bored or distracted teenager.
For the sake of their financial futures, it’s important that they don’t fall into that trap. The stock market is a great way to make money. And, when explained in simple terms, it’s a really interesting topic.
What Is the Stock Market?
The stock market is a place where small portions of ownership in companies, called shares, can be bought and sold. Think of it as an online supermarket, only:
- You are buying stakes in companies rather than groceries or home goods
- Prices fluctuate throughout the day
- It’s possible to sell as well as buy
This supermarket is open Monday through Friday during working hours and essentially functions as a matchmaker, pairing interested buyers with sellers and vice versa.
Indexes
At this point, you may be wondering what the media mean when they say the stock market is up or down. When people talk about the stock market in that way, they are referring to a representative portion of the marketplace for stocks, otherwise known as an index.
An index is essentially a list of stocks grouped together because they share something in common—similar to aisles in a supermarket. That could be something really specific, such as selling the same type of product, or much broader things, such as being from the same country or continent or simply being shares.
Here is a list of some of the most well-known indexes. They are viewed as barometers of business conditions in their respective nations and, in many cases, the rest of the world.
- S&P 500: The 500 biggest companies in the U.S. stock market
- Dow Jones Industrial Average: Thirty big U.S. companies considered to be leaders in their industry
- Nikkei 225: Japan’s 225 largest listed companies
- FTSE 100: The 100 largest public companies in the United Kingdom
- Euro Stoxx 50: The 50 largest public companies in continental Europe
How Does the Stock Market Work?
The stock market is made up of two main components: the primary market and the secondary market.
Primary Market
One of the ways that companies raise money is by issuing shares. Either they put together the necessary funds within the circle of people whom they know and remain a private entity, or they reach out to the general public and ask for money in return for stakes in the business.
The shares are first issued directly from the company as part of an initial public offering (IPO). A particular amount of shares will be made available at a specified price, and those interested will buy them, hoping that they increase in value.
Secondary Market
After the IPO, the shares that were issued are free to change hands repeatedly. This time, the company has no involvement. It’s individual investors buying and selling among themselves.
Rather than buy shares directly from companies, most investors buy them secondhand from other investors.
Stock Exchanges
When companies begin selling slices of ownership to the public, they do so on a specific stock exchange. Almost all countries have at least one venue where it is possible to buy and sell company shares. The United States has several major exchanges, including the New York Stock Exchange (NYSE), which is home to the likes of Home Depot, Visa, and Berkshire Hathaway, and the Nasdaq, which is where shares in Apple, Amazon, and Microsoft trade.12
Companies generally choose which stock exchange to sell their shares on. Collectively, these various exchanges constitute the stock market.