Investing in the stock market is among the most common ways investors attempt to grow their money, but it's also among the riskier investment options available. Understanding the basic concept of the stock market is a first step in becoming an informed investor. While the stock market is an extremely complex system, its basic traits are much more simple.
The most basic concept of the stock market is the idea that each share of stock represents a small portion of ownership of a corporation. While most businesses are founded by small groups of people, when a company "goes public" its owners decide to sell shares of stock and, in turn, receive cash from buyers. A company may have thousands of investors, but each one has the right to profit from the company's success and each runs the risk of losing money if the company performs poorly. Stockholders receive updates from the company and can vote for board members to influence the business's activities.
Trading is another key concept behind the stock market. Despite the name, trading refers to buying and selling shares of stock for cash, not actually trading them for other stocks. Stock trading takes place on open markets, in which anyone can participate. Most stock markets only allow brokers to place buy and sale orders, but anyone with access to a broker, including automated electronic brokers that operate online, can trade on the market. Since anyone can participate in stock trading, buyers and sellers are free to make transactions for any price they agree to.
Supply and Demand
A stock's price depends on many factors, the most basic of which is supply and demand. When a particular company's stock is in high demand, prices for its stock will rise. When more people want to sell shares than there are buyers for those shares, prices for those shares will fall. Demand is dependent upon how likely other investors think it is for a company's stock to rise in value. In a typical transaction, the seller thinks the stock is at its peak price, while the buyer expects it to rise in value at some point in the future.
For stock market investors, the basic concept of how the market operates has special significance. Since stocks are tied to individual companies, they are far more likely to change in value than other investments, such as currency, commodities and mutual funds. This makes the stock market a highly volatile, but potentially profitable, place to invest. Putting some money into the stock market is a way to diversify one's investments and take advantage of the chance for profits while keeping risk at a reasonable level by investing elsewhere at the same time.