The stock market sounds complex and its lingo can be intimidating. But investing in stocks is a way to help grow your money over time and support companies that can fuel the economy. Here’s an introduction to how it works, what to consider before you invest and some of the jargon to watch out for.
The simplest definition of the stock market is that it’s the marketplace where shares — called equities by financial professionals — are bought and sold. When a company raises money by selling its shares to investors, it can use that capital to grow the business and pay dividends to shareholders, who own part of the company. Historically, the stock market was where entrepreneurs raised money to launch businesses by selling their shares to investors. As a result, people who owned shares in companies saw their value rise and fall as the business performed well or struggled.
Today, the stock market is a global network of computers that match buyers and sellers at lightning speed. It operates on the principle that prices reflect all available information. That’s known as the efficient-market hypothesis.
Investors profit from owning stocks in two ways: through regular dividend payments and by a gain in the price of the shares, or capital appreciation. There are several factors that affect the price of a share, including demand from new and existing investors, a company’s earnings and profitability, and its products and services.
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