What is the Stock Market?

The stock market is the cornerstone of modern capitalism and wealth building. Understanding how it works is your first step toward financial independence. [DEFINITION] Stock Market: A marketplace where investors buy and sell shares of publicly traded companies, enabling businesses to raise capital and investors to grow wealth. ### How the Stock Market Works When you buy a stock, you're purchasing a small piece of ownership in a company, called a **share**. This ownership entitles you to: - A portion of the company's profits (through dividends or stock appreciation) - Voting rights on major company decisions - A claim on company assets (in case of liquidation) [EXAMPLE] Imagine you buy 10 shares of Apple at $150 each, investing $1,500 total. If Apple's stock price rises to $180, your investment is now worth $1,800—a $300 profit (20% gain). You've benefited from Apple's success without working there. ### The Two Major US Exchanges The United States has two primary stock exchanges: **New York Stock Exchange (NYSE)** - Located on Wall Street in Manhattan - World's largest by market capitalization ($25+ trillion) - Uses both floor traders and electronic trading - Known for established "blue-chip" companies **NASDAQ** - Fully electronic exchange (no trading floor) - Home to many technology giants - Generally faster trade execution - Known for growth companies [TIP] As a beginner, don't worry about which exchange a stock trades on. Your broker handles the mechanics—you just enter the ticker symbol and trade. ### Why Stock Prices Move Stock prices fluctuate based on **supply and demand**: - More buyers than sellers = prices rise - More sellers than buyers = prices fall [KEY] The U.S. stock market represents over 40% of global market capitalization and has historically returned about 10% annually over long periods—far outpacing savings accounts and bonds. [EXERCISE] If a company has 1 million shares outstanding and the stock trades at $50 per share, what's the company worth to investors? |ANSWER| $50 million (1,000,000 shares × $50 = $50,000,000). This is called the company's "market capitalization." [WARNING] Stock prices can be volatile in the short term. While the market has historically trended upward over decades, individual days, weeks, or even years can see significant declines. Always invest with a long-term perspective.