UNDERSTANDING THE STOCK MARKET

Have you ever wondered why the stock market is called a market? Well, a market is a place where goods are bought and sold. The stock market is where people buy and sell one type of product. That unique product is shares of ownership in a company, which are also known as stocks. Potential investors get to choose from many companies that sell a variety of goods, from clothing to medicines to sports equipment to toys. When people buy and sell stock, it’s called trading.

Who Am I If I Own Stock?
When a person buys stock in a company, that person becomes a shareholder in that company. (Stockholder is another name for a shareholder.) A shareholder is also called an investor in the company. When that company makes money, which can also be called earned income or profit, the value of the company’s stock often increases. That’s because more people may become interested in investing in the company. Sometimes, shareholders receive a dividend, which is part of the company’s earned income in the form of a cash payment.

Some people try to make money by buying and selling stocks. Stock prices can move up and down. Shareholders may make money or lose money by selling stocks that they own, depending on whether the price has gone up or down since they bought their shares. A company’s stock price may be affected by market or economic conditions. For example, let’s say that ABD Enterprises is a software company that has introduced a new video game into the market. If that game is a hit, sales of the video game could boost the company’s earnings. Because of the potential for ABD Enterprises to grow, its stock may be viewed as an attractive investment and its stock price may go up as more people buy shares. On the other hand, let’s say the video game that ABD Enterprises introduced is a flop. Or, it could be a good game, but ABD introduced it at a time when people started spending less on leisure products. So, the result is no one is buying the game, and it’s reported that ABD is losing money because of this new product. Then the stock price for ABD Enterprises may go down if a number of shareholders decide to sell their shares.

The hundreds or thousands of people who invest in a company’s stock also have an effect on the stock’s price. As more people want to buy shares, the stock’s price usually goes up because more people want to own it. On the other hand, if more people want to sell their shares and there is less demand for them, then the price of the stock may go down.
Are People the Only Ones Who Own Stock?
Just like an individual, a mutual fund can also buy or sell shares of a company’s stock. A mutual fund is a group of stocks and/or bonds that is owned by a group of people. A financial company is in charge of the mutual fund, which is managed by one or more portfolio managers. The people who invest in mutual funds are also known as shareholders because a unit of ownership in a mutual fund is called a share. A mutual fund uses the cash invested by its shareholders to purchase stocks, or in some case, bonds. The fund’s shareholders are indirect investors in thatportfolio of stocks or bonds. Since a mutual fund may contain the stocks of many companies in its portfolio, shareholders are often able to own a greater and more diverse number of stocks than if they invested directly in the stock market.

Two Measures of Market Performance
Stock market averages are often quoted in newspapers and on TV because they provide clues about overall movements in stock prices and whether most investors are trying to sell or buy shares. The most often-quoted market average is the Dow Jones Industrial Average, which was started by Charles Dow more than 100 years ago. He published it in a newspaper he owned with Edward Jones. The prices of a specially selected group of 30 industrial stocks (some of the largest companies in the United States) are averaged each day to determine the Dow Jones Industrial Average.

The Standard & Poor’s 500 Index (S&P 500) tracks not just 30, but 500 different stocks! That’s why many people think this index gives a clearer picture of the stock market than other stock market averages or indices. In addition, a number of mutual funds compare fund performance against the S&P 500 because this index includes companies from a number of industries like utilities, health care and financial services. Since the S&P 500 includes so many companies and industries, it’s known as a broad-based index. Although a mutual fund may compare its performance to the S&P 500 or another broad-based index, this does not mean the fund’s portfolio has the same stocks that are tracked in the index.