If you’re a casual observer of the stock market, it can seem like everyone is talking in a language that you don’t understand. If you’re thinking about investing, the language can feel even more daunting.
The stock market is a network of exchanges, like the New York Stock Exchange and Nasdaq, where companies list shares in an initial public offering to raise money for their business. Then investors can buy and sell those shares among themselves. Each share represents partial ownership of a company, and as the fortunes of the company rise or fall, so too can the value of its shares.
Prices are driven by supply and demand, with buyers and sellers constantly negotiating new prices in response to fresh information. Over the long-term, stock prices usually reflect how profitable a company is, with higher profits often leading to greater demand for the company’s shares, which can drive up their price.
Investors also track indexes, which are groups of stocks selected to represent a particular segment of the market. Examples include the Dow Jones Industrial Average, which tracks 30 large publicly owned companies, and the S&P 500, which follows the performance of 500 of the largest U.S. companies.
The most common way for people to participate in the stock market is through an individual brokerage account, which can be opened at many online brokers and allows individuals to trade investments directly through their accounts. Others may invest through mutual funds or exchange-traded funds, which are pooled investments of multiple investors. And finally, some individuals participate through margin buying, where they borrow (at interest) to purchase stocks in the hopes that they’ll rise in value and return their borrowed amount.
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