If you have ever flipped to CNBC while watching TV, or paged through to the finance section on newspapers, chances are you’ve heard of the term “stocks.” You might even know some fun “ticker” symbols: SBUX, AMZN, GOOGL. But what even are stocks anyway?
A stock is essentially a piece of ownership to a company. A typical business generally starts with a person or small group of people who put their money in for the company’s future success. At that point, the company is considered “private.” But when a company reaches a certain size, they might decide to go public, and go through an “Initial Public Offering.” This means that the company will sell a chunk of itself to the public to invest in. When you buy a stock of a company, you become an owner of that business. That means if you buy even just one stock of the 2.88 billion “shares outstanding” that Facebook pushes out to the public, you become a Facebook owner!
Investors trade stocks on the stock market, where these stocks are made available for the public to buy and sell. Often, when you “buy” a stock, you are buying it from another investor who wishes to sell the stock, as opposed to buying directly from the company itself. And vice versa, with selling. You have probably heard the names of these huge U.S. stock exchanges at some point: New York Stock Exchange, National Association of Securities Dealers Automated Quotations (NASDAQ).
Many investors are represented by a broker, or a “middleman” that represents them, in exchange for commission fees. These days, many people use online brokerage platforms that help connect them to the stock exchanges, such as TD Ameritrade, Vanguard, and Fidelity investments, among many others.
Indices are essentially mathematical averages that tell you the conditions of the stock market in a really quick way. If ten of your friends got together and averaged your height, that number is essentially what an index is! They are groupings of stocks that measure past performances and trends and serve as a proxy for the market in either percentage or point terms. Some of the most followed stock indices in the U.S. are the Dow Jones Industrial Average and Standard & Poor’s 500 (S&P 500).
The S&P 500 is the index for the 500 largest U.S. companies all rolled up into one. Though the U.S. has over 4,000 stocks, the S&P 500 is really a huge representative chunk of the entire market. This index is measured in percentage points, so you may hear that the S&P or “market” is down 10 points or up 10 points.
The “Dow” is made up of the 30 largest and most influential companies in the U.S. It is the most widely quoted within the press but really has a narrow representation of the broad market.