What Exactly Is The Stock Market?

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What Exactly Is The Stock Market?
Traders on the floor of the New York Stock Exchange (Photo: Getty Images)

Even if you have a retirement account or other investment portfolio, you might be confused about what the stock market actually is. So let’s sort it out.

The stock market is a place where just about anyone can make an investment into a company by buying “shares.” Buying a share makes you a partial owner in a company, although you won’t get to make decisions about how the business is run. Once a business is listed on a stock market and investors start buying shares, you can imagine that the business is broken up into thousands of tiny parts.

The terms “stock market” and “stock exchange” are sometimes used interchangeably. In the U.S., there are two major stock exchanges, or locations that stocks are traded. Both are in New York City: the New York Stock Exchange on Wall Street and the Nasdaq, which is located in Times Square. A company will usually list its shares for trading on one of the exchanges, but not both.

Companies that are traded on a stock market are usually established enough to be serious players in their industry. A company gets onto the stock market through an initial public offering, or IPO, which are the first shares it sells beyond any private investors who provide funds to get the company started or help to help it grow.

If a company is doing well and its stock is popular, the price goes up. If the economy isn’t doing so hot or that company has a bad day in the press, the price may go down. These fluctuations impact how much your share of that company that you already bought is worth in your portfolio. If you decide to sell your shares when the stock price is up, you may get more money in the sale than you initially paid. If the stock price is down when you sell, there’s a chance you’ll lose money.

Who are the people on the trading floor?

Back in the pre-computers day, traders had to show up at the stock exchange and buy and sell shares there. Now, most trading is done online, so far fewer human traders are required to actually work on site.

Honestly, a lot of it is for show. Stuff happening on a computer is a lot less exciting than watching this guy or this guy react to market fluctuations. (But seriously, everyone’s favourite is this guy.)

I saw a headline about the stock market being up/down. What’s up with that?

When you hear on the news that the stock market had a good day or a bad day, that doesn’t mean that everyone at the stock exchange threw a tantrum or the computers broke. It means that the index funds that can provide a quick glance at the market’s performance performed positively or negatively.

Two of the biggest ones in the U.S. are the Dow Jones Industrial Average and the Standard & Poor’s 500. “The Dow” includes stocks from 30 major companies, while the S&P 500 includes stocks from 500 large-cap companies, which are well-established companies that generally have a high value.

While you might have individual company stocks in your portfolio, you probably also have some shares of at least one of these popular indexes. But say for example the S&P 500 has a crappy day and you know you have a portfolio that’s packed with S&P 500 shares. Should you sell your shares and get the heck out of there?

Nope. You’ve got to hold on. The performance (think: popularity) of these stocks can fluctuate by the day and even by the hour. Your losses only become real if you actually sell your shares. If you hold on to them and the value of those shares rebound, the value of your portfolio goes back up too. That’s why you’re supposed to wait until stocks are “high” to sell, although if you’re investing for long-term returns, like for retirement, you’ll want to hold on to your investments for as long as possible—historically, the stock market delivers positive returns (profit) on your investments, even if it has periods of poor performance.

What about bonds and other types of investments?

You can buy a share of just about anything: debt, currency, gold. But bonds are a big one for everyday investors.

When you buy a bond, you’re buying a company’s or a government’s debt. You also do this in the form of shares.

You’re like, “Yeah, I’ll front you some money, because when you pay me back I’ll get a little extra for helping you out.” Bonds are typically considered less risky than stocks because there’s less fluctuation in value.

If the company for which you own bonds goes under, you’ll be on the list to get your investment back; governments don’t tend to go under, especially the U.S.—it always manages to pay back its debts.

We’ve got more bond basics in this post, but for now, just keep in mind that you can buy more than just shares of individual companies on the stock market. But not everything gets traded on the floor of whatever stock exchange. Bonds don’t have a central trading spot like stocks do, although you’ll hear discussion about the “bond market.” And sometimes, you’ll hear people talking about the stock market or just “the markets,” and that discussion will include trading beyond stocks and bonds.

But what do I really need to know about the stock market?

Not interested in day-to-day investing news? No problem. The reason people talk about the stock market or “the markets” so much is because it can provide an indicator of how the overall U.S. economy is doing.

If one company’s stock goes down, it means there’s probably an issue with that specific company’s performance.

But if every stock that’s included in the S&P 500 takes a dip on the same day, for instance, something’s up that has investors worried about the larger business scene—maybe discussion about a trade war, or, you know, an approaching pandemic.

If the markets are up? Then investors are feeling optimistic.

Tracking the daily fluctuations isn’t necessary if you’re building a nest egg in a balanced portfolio designed for long-term growth.

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