Introduction To The Stock Market

By Pinyo, on June 26, 2008

Last week, I wrote Introduction To Morningstar Style Box and thought it’s a good idea to start writing more introductory level articles about investing. Over the next few weeks, I am hoping that I could organize my Investing archive into an “Investing for Beginners Series” for your convenience. In this article, I’ll attempt to answer three basic questions:

• What is a stock?
• What is “the stock market“?
• What is a stock market index?

What Is A Stock?

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 1/9,310,000,000) — so I really meant it when I said tiny. In other words, to own 1% of Microsoft, you would have to own about 93 million shares, or approximately $2.6 billion (as of 6/25/2008).

How Do You Make Money With Stock Ownership

Fundamentally, there are two ways that you can make money in the stock market.

1. You buy shares of a company and the price of these shares goes up because the company is doing well. Later on, you could sell these shares at a higher price and make profit on your initial investment. On the other hand, the company could do poorly and you’ll end up losing money. Note: this basic explanation doesn’t account for other factors that affect the stock price.
2. Additionally, some stocks offer quarterly dividend payment. Dividend is usually expressed in a percentage called Dividend Yield. For example, Microsoft offers a dividend of 44 cents, or a dividend yield of 1.6%. If you own 100 shares of Microsoft, you’ll receive $11 each quarter as the dividend payment.

What Is “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:

• Toronto Stock Exchange
  
• Hong Kong Stock Exchange
• Tokyo Stock Exchange
• Frankfurt Stock Exchange
• London Stock Exchange

You can see a more comprehensive list of major stock exchanges at Wikipedia.

What Is A Stock Market Index?

When you hear the newscaster report the “Dow Jones Industrial Average plunged 400 points,” he’s referring to what we call a stock market index. There are many stock indices, and the most famous ones in the United States are:

• Dow Jones Industrial Average (DJIA) — This index consists of 30 of the largest and most widely held public companies. It is the most cited and most widely recognized of the stock market indices
• S&P 500 — This index consists of the 500 largest corporations and is considered the barometer for the U.S. economy. It is most famous for the numerous index funds that are designed to match its performance, leading to indexing revolution of the recent years.
• NASDAQ Composite — This index consists of all common stocks and securities listed on the NASDAQ stock market. It is considered the key indicator of technology and growth companies performance.

There are many stock market indices from around the world, for example:

• British FTSE 100
• French CAC 40
• German DAX
• Japanese Nikkei 225
• Hong Kong Hang Seng Index

I hope this article helps 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.

Photo by thinkpanama (investing), mlmtdotcom (NYSE), and travel aficionado (DAX) via flickr

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Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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