Stock Market A to Z: What Is It Really?
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.
For those who feel intimidated, we’re starting a series for you: Stock Market A to Z. We’re starting with the extreme basics, cutting through jargon and bad advice to explain what the stock market is and how to invest in it.
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 and fearless girl statues 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 Standard & Poor’s (S&P) 500:
“The Dow Jones Industrial Average is approaching a record high of 27,000.”
“The S&P 500 dipped 32 basis points today.”
But practically, the stock market isn’t so much different than any other market. It has specific rules to keep things orderly and fair.
The stock market is for buying and selling stocks, much the way other things are sold in markets throughout the world.
In reality, neither the Dow nor the S&P 500 is the stock market. These are indexes. 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.
Changes in the Stock Market
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 indexes (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.
It’s not possible to time the market. In other words, you can’t predict what it will do in the short-term. You can’t say for sure it will go up, nor can you say for sure it will go down. But the markets trend up across time, and counting on that is how smart investors make money. They buy quality stocks and hold them for the long-term, patiently waiting for the value to move upward across time.
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 on their respective platforms of course. 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.
Stock Market A to Z: Go Forth and Invest!
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, its never been easier for beginners to invest in the markets. It’s also never been safer.
In the United States, the Securities and Exchange Commission (SEC) regulates stock market activity. It sets the rules and aims to protect investors. It wants to promote fair and orderly capital formation through market activities.
Movies like Flash Boys and The Big Short would have you believe that the stock market is “rigged” against the little guy. 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.
And if you want to get your toes wet, there are tons of apps that make it easy. For instance, Stash allows you to start investing with as little as $5. Plus, your first month is free.
The Next Installments of “Stock Market A to Z”
This is the first in a multi-part series on investing and the stock market. For more from this series, check out the following topics: