The stock market is the mechanism by which companies raise money and individuals become shareholders, receiving a portion of ownership in the company. The value of shares can rise or fall based on the company’s performance, economic indicators and investor sentiment.
Investors buy and sell stocks on a network of exchanges, including the New York Stock Exchange and Nasdaq. These exchanges track the supply and demand for each stock, setting prices based on what investors are willing to pay. Buyers offer a “bid” and sellers place an “ask.” The difference between the two sets the price of a share. The higher the bid, the more a stock will rise in value; lower the bid and a stock will decline in value.
Traders can also purchase shares through mutual funds or exchange-traded funds (ETFs), which pool the money of many investors to buy a basket of stocks. They can also trade on their own through a licensed broker or invest through an investment advisor. Regardless of how they choose to participate, each individual’s portfolio will reflect the combined total value of all their shares.
Stocks are considered ideal for a long-term horizon — like retirement — and can provide a healthy gain over the years, even after taking into account inflation. However, they can be volatile and are typically not a good idea for a short-term investment (money you need for an expense within five years).
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