The Stock Exchange
What is a share of stock?
As the term implies, when you own a share or stock
you share in the ownership of a corporation. What
percentage of the corporation does a share represent?
That varies a lot across corporations. While each
share of a given corporation is of equal value, its
entirely up to the corporation to decide how many
shares it issues. The very largest corporations can
have hundreds of millions of shares outstanding, in
which case a single share represents ownership of
a very tiny percentage of the company.
What is a public company?
A public company is a corporation whose shares may
be purchased or sold by members of the general public
on their own initiative. A corporation that picks
and chooses who can own its stock is, by contrast,
a private company. In this sense, a private company
is rather similar to a partnership.
What is the stock market?
Its a shorthand term for all the buying and
selling of stock that goes on. Here the term market
is used in essentially the same sense as we speak
of the market for oil or the market
people talk about the market being up
or down on a given day, they normally are looking
at an index that calculates the average price movements
of a group of stocks. The most popular indexes include
the Dow Jones Industrial Average (it consists of 30
representative companies on the New York Stock Exchange),
the S&P 500 (500 of the largest public companies)
and the NASDAQ index (which includes many of the larger
companies traded through dealers rather than exchangessee
the next question).
How is the price of a share of stock set?
Some stocks trade on exchanges (like the New York
Stock Exchange), which are designed to move shares
directly between buyers and sellers who have indicated
a desire to trade at the same price. The process is
similar to an auction. Other stocks are traded through
securities dealers (this is the over the counter
or OTC market, of which the NASDAQ is a part), who
buy shares from some investors and then seek to resell
them at slightly higher prices to others. This is
much as antiques dealers work.
either case, the price of a stock ultimately is determined
by what investors are willing to pay for it. And what
they are willing to pay, in turn, depends on their
assumptions about the companys prospects for
future profits (if profits seem headed up, the price
should move up also, and vice versa). And their expectations
of future profits depend a lot on general economic
conditions. Thats why theres a tendency
for the majority of stocks to move in the same general
direction in response to breaking world and national
Is a $100 share expensive? Is a $1 share cheap?
You cant judge a stock to be expensive or cheap
based solely on its current price. The former company
may be highly profitable, with great prospects for
the future, while the latter firm might be losing
money and headed for bankruptcy. The real question
is whether a given share price represents good value
for the money, in terms of the companys present
profits and future outlook. Since no one can really
foretell the future, smart investors might have highly
different views. Unfortunately, theres no single,
simple formula to determine whether or not a given
stock represents a good value. This is why many people
say that investing is an art as much as a science.
What are mutual funds?
They are groups of stocks bought by professional money
managers on behalf of ordinary investors. Mutual funds
are a way for investors to delegate investment decision
making to an expert, while also diversifying. A diversified
investor has money in a number of stocks, thereby
reducing the chance of being hurt badly should a single
stock fall sharply. By buying a mutual fund you are
buying a piece of a whole group of stocks.
Whats the secret to making money in the stock
Sorry, theres no magic formula. As already mentioned,
a lot depends on predicting the future prospects for
a given company or industry, and even the best professionals
have spotty records in this regard. That said, those
who learn how to save, who buy into quality companies
and who are patient (formulating their investment
goals in terms of years, even decades, rather than
weeks or months) are most apt to succeed.
Explaining the Stock Market to Kids by Mark Kolakowski