I actually agree with you. When news reports discuss most of the issues of the day, they either provide enough background so that people can understand (to a degree) what’s going on or they rely on very big news stories of the recent past that people who have been following the news for the last month will have enough background to understand the latest story. With financial news (and, to a lesser extent, sports news), that’s simply not the case. People in the media assume a surprising amount of knowledge from their listeners/readers/viewers.
I think the reason for this is that they assume that the people for whom the segment has any value at all will know what they’re talking about, and for those that don’t, the segment is just a short piece that doesn’t really have any meaning and they’ll just sit through it.
That’s a shame, though, because burying financial news in a bunch of lingo makes it inaccessible to a lot of the American public. Even if you’re not an investing, it’s never bad to at least understand what they’re talking about and how it’s potentially relevant to you.
In this article, I’m going to try to explain most of what they’re talking about on those news reports in simple language. I’m going to simplify a few things solely for the purpose of not going down a deep rabbit hole of specific laws and instead stick to what a layperson should know in order to understand the stock market.
So, let’s start from the very basics: What exactly is a stock market?
A stock market is simply a place where people get together to trade shares of stock. Some people might be there to buy shares, while others are there to sell them.
A share of stock is simply a tiny fraction of ownership of a company. Let’s say that Coca-Cola has issued 10 million shares of stock over the years. If you own one share of Coca-Cola, then you own 1/10,000,000 of Coca-Cola. That’s not really enough to do much in terms of managing the company, but it is enough (in some companies) to give you at least some tiny voice in how the company is run and, more importantly, it means you’ll receive dividend payments.
A dividend payment is just a very small payment given out by a company to the owner of each and every share of that company. If Coca-Cola pays out a $0.10 dividend, then every single person owning a share of Coca-Cola stock will receive $0.10. Many companies pay a quarterly dividend, meaning they make this kind of payment every three months. Some companies don’t pay dividends, while others vary their dividend amounts quite a bit over time.
So, one way that wealthy people earn an income without having to work for that income is that they own lots of shares of stock. Let’s say one person owns 1,000,000 shares of Coca-Cola. If they make a dividend payment of $0.10 every three months, that person is receiving $100,000 from Coca-Cola every three months automatically. That’s a pretty sweet deal.
Because of those two factors – the dividends you’ll probably earn in the future as long as you own that share and the potential to have some voice in how the company is run – a share of stock has value in and of itself. If you buy a share of Coca-Cola stock for $50, it’s probably going to hold most of that value and has a good chance of rising in value. People will always want to buy it because it ensures that dividend over the long haul.
Individual shares of stock rise and fall in value all the time. If a company’s future looks bright, then the value of the shares of that company are likely to go up. If a company’s future doesn’t look bright, then the value of the shares of that company are likely to fall.
How exactly does that happen? Well, if a company’s future looks bright, the people at the stock market who might be selling shares of that company will want more money for that share. If the Coca-Cola Corporation issues a report on their earnings and it says that more people are buying Coke products than ever before and that the Coca-Cola Corporation earned record profits, then the people who own shares in Coca-Cola are going to want more money for that share to sell it. The reverse is true if a company’s future looks a bit bleak; people are likely to be willing to sell for less in order to dump a potential loser that won’t earn as much dividends in the future or might even become valueless if the company fails.
All of this action happens at a stock market. A stock market, as I noted earlier, is a place where people go to buy and sell shares of stock.
A stock exchange is basically an organized stock market, where the group running the stock exchange verifies the people who are able to buy and sell there (to ensure everyone’s honest) and also typically decides whether the shares of a particular company can be bought and sold there (to keep out fake companies and minimize scams).
In general, when you use the phrase “the stock market,” you’re actually referring to a bunch of stock exchanges and smaller markets where people actually do the trading.
You’re probably familiar with a few stock exchanges. The New York Stock Exchange is an enormous stock exchange in New York City. The London Stock Exchange is an enormous stock exchange in London. The NASDAQ is another stock exchange, but this one is an electronic exchange, meaning trades on that exchange are done entirely by computer. Many of the world’s largest cities have their own stock exchanges, and they all operate in basically the same way. They allow only a certain number of registered and verified people to buy and sell shares of stock there, and only shares from listed companies can be bought and sold there. (Listed companies means the companies that are allowed to have their shares bought and sold at that particular exchange.)