How the Stock Market Works (Hint: It’s Easy!)

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Investing 101 Managing Your Money
how the stock market works

The stock market is one of those things everyone talks about and few people really understand. It’s like a ninja, moving in the shadows, cloaking itself in darkness. Knowing how the stock market works is the key to kicking your finances up a level.

Think of the stock market as a big playground of companies. They all initially came out for the same reason: the monkey bars. Just kidding! It’s to raise money. When a company goes public (aka starts selling shares/stocks on the stock market) it means they have opened up to the general public.

How the Stock Market Works

Becoming a Shareholder

Normal people (who maybe think of the stock market as a ninja) can now buy or sell shares in this company. Called an initial public offering, this is when the price of a company’s stock and how much stock will be offered is determined. All the money made off an IPO goes back to the company to help it grow. Once a “normal person” learns how the stock market works and buys a share in the company, they own a part of the company. They are now a shareholder.

After an IPO ends is when the fun really gets started. People still buy and sell the shares only the money doesn’t go to the company anymore. Now it’s going to the people doing the trading. Now remember, when you’re buying stock, you are literally buying a piece of a company. Sometimes those pieces come with bonuses. Holler! Who doesn’t love a bonus? It’s like ordering pizza and getting free cinnasticks with it.

A dividend is part of the company’s profit, which they will send to shareholders as long as they own shares. A shareholder vote allows shareholders to vote on how the company is run and to elect a board of directors.

Portfolios

Maybe you’ve heard the phrase “diversify your portfolio.” It’s a good idea and simple to do. All that means is investing in a diverse array of companies. Putting your money in different kinds of companies protects you. If one investment goes belly up, you won’t lose all your money because you’ve spread it out. Putting all your eggs in one basket can be a big risk, so try to avoid it, but that’s the game of the stock market in general. Risking a little can yield big rewards or big losses.If you want to know how the stock market works, here's a basic guide to get you started on the right foot with an explanation anyone can understand.

Buying Stock

You’re probably wondering how you even GET stock to begin with. You can buy or sell through a broker at any time, assuming there is enough volume of the stock to sell. A stock broker works with a brokerage firm and makes the sales for the normal people like you and me. You can also buy and sell stocks online yourself through online brokerage firms.

There are a lot of laws surrounding the stock market and no one can just walk up to it willy nilly and start trading in big numbers. Brokers have to pass several tests before they can start trading. Volume means the amount of shares that are traded each day. Stocks with large daily volumes tend to be more attractive to investors because they’re less of a risk. Because they do a large daily trade, you probably won’t get stuck with a tanking stock. After all, you’re here to make some money!

When stocks go up, it means lots of people are buying the stock. It’s become valuable. When it goes down, it means people are selling faster than buying. It’s very hard to predict when either of these will happen, and it’s illegal to make it happen. That would be insider trading, or using nonpublic information to manipulate stocks.

So, are you feeling ready to become the next big success story of the stock market and learn more about how the stock market works? After all, you could be a young Warren Buffett! Just start small. Take this basic breakdown of the stock market and start thinking about how you can get yourself involved in the investing world.

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