The stock market is an essential component of our economy. It’s not just for wealthy people — over a million Americans work in finance, and many have 401(k) plans and other investments. But sometimes hearing about the markets can feel like listening to a foreign language, one you want to learn but can’t quite grasp.
The basics:
Historically, companies that wanted to raise cash by selling shares would do so in the primary market by giving them away directly to friends and family or through an initial public offering (IPO). Now, they’ll usually hire an investment bank to conduct an IPO, which then sells the company’s stock on the secondary market, where brokers match investors who want to buy it with those who want to sell it. The stock price rises or falls depending on supply and demand, as well as other factors like economic conditions.
When you hear about the stock market, people are most often referring to the performance of an index that tracks prices on a group of stocks — for example, the Dow Jones Industrial Average or the S&P 500. These indexes give you a quick overview of how the market is doing, but it’s important to remember that the performance of individual stocks can differ significantly from what an index says.
A stock’s price can also be impacted by events that are outside of the company, such as changes in interest rates and inflation or political events or natural disasters. Investors can even be “short” a company’s share, meaning they think its stock price will decline. In this case, they’ll instruct their broker to borrow shares, then sell them on the secondary market and return them later — netting a profit that’s less the cost of the loan and brokerage fees.
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