Do the words bulls, bears and market jargon sound like a foreign language that you would love to learn but can’t seem to grasp? If so, you are not alone. Understanding how the stock market works and its lingo can make the prospect of investing less overwhelming.
The stock market is a place where entrepreneurs raise money often referred to as capital to grow their businesses by offering shares for sale, making them part owners of the company. Investors then profit from their ownership of the company in two ways: dividends and capital appreciation.
People who want to buy a share of a company and investors who want to sell their shares match up on an exchange such as the New York Stock Exchange (NYSE) or Nasdaq. Brokers facilitate the buying and selling of shares in a company on behalf of their clients. Share prices rise and fall depending on demand and supply.
Besides being influenced by the profitability and growth potential of individual companies, the price of stocks can also be affected by outside factors such as the economy, government regulations and global events. For example, a company’s stock can drop if the company is reported to have faulty products that affect consumer confidence.
Individuals invest in stocks primarily through a brokerage account with a broker, an investment advisor or through an exchange-traded fund (ETF). These financial vehicles pool money from many individuals to purchase a basket of securities. The stock market is overseen by the Securities and Exchange Commission in the United States as well as by individual state regulators.