Investing in the stock market can feel like listening to a foreign language. If you’re just starting out, understanding what a stock market is and how it works can help the whole concept seem less intimidating.
The stock market is a marketplace where people looking to buy shares of a company meet with sellers who have those shares to sell. Companies go public by selling shares to the general public, which allows them to raise money for their business and gives investors a chance to participate in any profits the company makes.
In the long run, stocks grow in value based on whether a company grows its sales or profits. A company with a good reputation and future prospects will usually see its stock rise. In the short term, the price of a share fluctuates, depending on demand and supply. Occasionally, stock prices get out of hand, often due to exuberant market psychology or speculative buying. This leads to a bubble, which eventually bursts.
The stock market is regulated by the Securities and Exchange Commission and individual state regulators. Most Americans first hear about the stock market from indexes, such as the Dow Jones Industrial Average and the S&P 500, which show how large publicly owned companies are doing. News programs also report on the daily ups and downs of the market. Increasingly, Americans are hearing about the stock market not just for its indirect effects on their jobs but because it’s tied to their retirement savings and investment strategies.
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