Oftentimes when people hear the word “investing”, another word immediately comes to mind: “stocks”. This is because stocks are one of the most popular types of financial assets that people invest in. But what are stocks, and how do they work?
The simple definition
A stock is a piece of a company that you can buy and sell. When you buy a stock, you are actually buying a very, very small piece of a company! For example, if you buy a stock of Apple Inc, then you officially own a piece of Apple. You may also hear people call stocks “shares”, because when you buy a stock you are buying a share of that company.
Buying a “piece of the pie”
It can also help to compare buying a stock with buying a piece of a pie, where the pie is a company and the piece is a share. The more pieces of pie you buy, the higher percentage, or portion, of the pie you own.
Where are stocks bought and sold?
Stocks are bought and sold on stock exchanges. A stock exchange is where investors come to either buy or sell stocks, and connect with the buyers and sellers of different stocks. In the pie case, the stock exchange is a place where different bakers sell pieces of their pies. Just imagine that this place is huge, and has thousands of different bakers selling pieces of their pies, and also has customers exchanging pieces of pie between themselves.
Stock brokers and stock exchanges
Now one thing that makes it a little more difficult to buy and sell stocks on a stock exchange is that these exchanges only take orders from people who are members of the exchange. This membership isn’t something you can get easily, so there are special people and firms (businesses) who hold these memberships. These special people and firms are called brokers. A broker’s job is to be the middleman between the stock exchange and the person buying or selling shares. Keep in mind that these brokers don’t work for free; they make their money through fees, commissions (a percentage of a sale), or money from a stock exchange itself.
Stock exchange vs market
A stock exchange is where investors work with brokers to buy and sell stocks. An example of a real world stock exchange is the New York Stock Exchange, also known as the NYSE, which is currently the world’s largest stock exchange. However, a stock exchange is not the same thing as a stock market. A stock market is a collection of many stock exchanges and other places people buy and sell assets. So, if someone buys and sells stocks in a stock market, they are actually making a trade in one of the stock market’s stock exchanges. One example of a stock market is the United States’ stock market, which includes stock exchanges like the New York Stock Exchange and the Chicago Mercantile Exchange.
Ticker symbols
Just like a pie needs a name in a bakery, a stock needs a name in a stock exchange. Rather than using a company’s long and formal full title, short symbols are used to tell which stock is which. These symbols are made up of a few letters, and are called ticker symbols. Here are a few popular ticker symbols: AAPL (Apple Inc), MSFT (Microsoft Corporation), and XOM (Exxon Mobil Corporation).
Takeaway
To summarize, a stock is a very small piece of a company. Brokers help investors buy and sell stocks on stock exchanges, and a stock market is a collection of places where people buy and sell stocks. Special symbols called tickers are used to specify what stock is being traded, and each company has a ticker unique to them.
Now that we know the basics of what stocks are and how they are traded, we will be able to understand important features of each stock, what makes one stock different from another, how to actually get started buying and selling stocks, and many more other topics. We will cover all of these topics in future articles!
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