Everybody talks about the stock market. And when they do, the assumption is that the listener understands what the stock market is, and what it isn’t.
Sometimes, though, the listener may not be entirely sure what the stock market is at all. It’s one of those things in modern life that we take for granted, and yet, too often the entry-level 101 introduction never really took hold.
So if that’s you, here’s what you need to know about the stock market, at its most elementary, rudimentary level. And it may not be what you think it is.
The Stock Market, Defined
The stock market is a place where anyone – individuals, companies, retirement plans, investment groups, etc. – come together (figuratively) to buy and sell shares of stock. There are several major stock markets where this happens – yes, it’s an actual place, where representatives gather to buy and sell on behalf of their clients, but it’s also a virtual (digital) place where the same thing happens, only electronically.
A share of stock is nothing more than a share of ownership in a company. Literally. If a company has a million shares of stock outstanding – which means, shares that are actually issued and are owned by entities and individuals – then each share represents 1/1,000,000 (one one-millionth) of the total ownership of the company.
The better the company does, the more that share of stock will be worth on the open market. That’s the idea of it in a nutshell.
But of course, the reverse is also true.
The Worth of a Share of Stock
So what does that really mean, and how much is that share worth? Well, there are two answers to that. First, it’s worth 1/1,000,000th of the net value (assets minus liabilities) of the company itself. So, in this example, if the company is worth $1 million on paper, then each share is theoretically worth one dollar.
But when it comes to buying and selling stock on a stock market through a stock broker (the person representing you in this transaction), it doesn’t quite work that way. Because stock markets run on supply and demand. It’s just like used cars, where the original sticker price of the car is no longer relevant. In fact, that’s a great analogy here, because shares of stock bought and sold actually are used shares, stock that is already owned by someone else.
But unlike used cars, sometimes used stock is actually worth more than its original price. And that, when it happens, is a wonderful thing, indeed.
The Math Doesn’t Really Matter
Let’s say you buy a hundred shares of XYZ company stock on the New York stock exchange. Who gets your money? Well, it’s not XYZ company. In this case it’s the person who previously owned those shares and has put them up for sale.
The only way a company actually receives the proceeds of a stock sale is when they sell newly issued shares, which doesn’t happen via a stock market, per se, but off-the-market through investment bankers (a fancy term for new stock sales people).
This is the stock market at its most simplistic – a place to buy and sell used (or more accurately, previously- issued and owned) shares at a price determined not so much by what the company is worth on paper, but by supply and demand pressures. The more people want the stock, the more it will be worth.
And of course, the better a company does, the more people will want to own it. But don’t take that to the bank, there are a million other factors that come into play in determining how the market values shares of stock.
The More You Know, the Less You Really Know
This only cracks the lid on the can of worms that is the stock market, but at least, armed with this understanding, you’ll no longer have to wonder what people are talking about.
The stock market runs on fear, greed, hope, emotion, forecasts and actual numbers, not necessarily in that order, which means that while you may not know as much as you think you should, you may know enough to actually know what the other guy is talking about, even if he doesn’t.
