Stock Market A to Z: What is the Stock Market Really?
The stock market seems complicated and confusing for many people. But don't worry – we've got you covered on investing basics.
Many people call the stock market the greatest wealth-creating mechanism of all time. Millionaires often credit stock market investing as the key to their wealth. Do you want to become rich? If so, you need to understand investing.
But investing can feel intimidating to even the smartest people.
For those who feel intimidated, we’re starting a series for you: Stock Market A to Z. We’re starting with the extreme basics. We’re cutting through jargon and bad advice to explain what the stock market is and how to invest in it.
Section I: What is the Stock Market?
Try to answer that question. Perhaps you pictured a chart like this one:
Or maybe you pictured the famous charging bull on Wall Street:
Some people picture a screen of ticker symbols:
As a kid, I pictured people screaming at each other while looking at huge screens on the floor of the New York Stock Exchange. You probably thought to yourself, “The stock market is a market in which stocks are bought and sold.” That’s what I thought when I posed the question to myself.
Now I have a degree in economics and seven years of investing experience. I’ve even written about investing for three years. Still, that was my first stab at a definition.
Most of us hear a lot of Wall Street jargon, but we can’t pinpoint a definition of the stock market.
Some of us associate it with popular indexes like the Dow Jones Industrial Average or the S&P 500. “The Dow Jones Industrial Average is approaching a record high of 21,000.” “The S&P 500 dipped 32 basis points today.”
In reality, neither the Dow nor the S&P 500 are the stock market. These are index funds. They measure the value of a certain set of stocks. Pundits and commentators use the indexes’ upward and downward movements to indicate the health of the stock market. However, the indexes themselves are mere slices of the larger pie.
Investors and commentators know to expect small changes in the stock market day in and day out. Most of them are more concerned with trends that last weeks or months. Upward trends in stock market indicators (like the S&P 500) are called bull markets. On the other hand, downward trends are bear markets. Most people will associate bull markets with excitement over buying and holding stocks. Bear markets make us cringe. Investor portfolios lose value, and they often sell – much to the detriment of their long-term wealth.
The “stock market” is an emergent phenomenon that arises from countless financial interactions each second. People, corporations, and governments buy and sell stocks, bonds, and other securities. In doing so, the corporations and governments raise money (capital) to complete expensive projects. Economists often say that the financial markets grease the wheels of the modern economy. Without the stock market (and investor money), corporations and governments wouldn’t be able to take on large-scale initiatives.
Nobody – not even a government – can control the stock market.
You make your own investing decisions, but your decisions influence the whole market. In fact, you could even argue that each decision influences the whole world. After all, the stock market allows corporations to receive money for shares of ownership. It allows corporations and governments to sell their debt. It greases the wheels of the global market, and the global market – with all its charms and faults – couldn’t exist without it.
Yes, the stock market is big and extremely complex and often confusing. But don’t let that scare you away from investing in it. You don’t have to have a master’s degree in finance to start. You don’t have to understand every financial nuance to make a profit. All you need is to understand what you’re buying and why you’re buying it. In this series, we explain financial products that beginners can use and understand right away. We recognize that all financial products have their place, but most people need to start with the basics. Thankfully, it’s never been easier for beginning investors to profit from large corporations. It’s also never been safer.
In the United States, the Securities Exchange Committee (SEC) regulates stock market activity. They set the rules and aim to protect investors. They want to promote fair and orderly capital formation through market activities.
Movies like Flash Boys and The Big Short would make you believe that the stock market is “rigged” against the little guy. Indeed, bigger investors often manage to get sweetheart deals that boost their investment returns. But the stock market isn’t rigged. Today, you can invest money in excellent companies at low costs. In fact, you can invest your money in “all the companies” through index funds. The stock market isn’t a “rich boys” club. It’s an investment tool for people like you and me.
Keep an eye out for our future topics:
- Who should invest in the stock market?
- Why you shouldn’t talk to a financial advisor… right now.
- How to start investing.
- What investors know that gamblers don’t.
- An investor’s storyline.
- Don’t give up too early.
This is the first in a multi-part series on investing and the stock market. New installments will appear every Wednesday. Stay tuned!