Following the success of Introduction To Morningstar Style Box, I thought it might be a good idea to start writing more introductory level articles about investing. In this introduction to investing in the stock market series of articles, I will attempt to answer three basic questions:
A stock is basically a share of ownership in a corporation. When you buy 1 share of Microsoft you own a tiny fraction of the company (approximately 1/8,400,000,000) — so I really meant it when I said tiny. In other words, to own 1% of Microsoft, you would have to own about 84 million shares, or approximately $2.2 billion worth of Microsoft stocks (as of 4/20/2011).
Fundamentally, there are two ways that you can make money in the stock market.
Often, we speak of the stock market as if it’s a singular entity that exists somewhere. In fact, there are many physical stock markets, called stock exchanges. Two well-known stock exchanges in the United States are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation System (NASDAQ).
Other major stock exchanges include:
You can see a more comprehensive list of major stock exchanges at Wikipedia.
When you hear the newscaster report the “Dow Jones Industrial Average plunged 400 points,” he is referring to what we called a stock market index. There are many stock indices around the world, and the most well-known ones in the United States are:
There are many stock market indices from around the world, for example:
I hope this series of articles help you understand the concepts stock, stock market, and stock market index a little better. As a follow up to this article, I’d like to recommend: Practical Investing Guide For Beginners. If you hands on investing is not for you, you can also check out investing for beginners using Betterment.
Reviewed and updated April 20, 2011.