Stock market: A place for investors to buy and sell shares in public companies. Traders use computers that operate at lightning speed to match investors who want to buy stocks with those willing to sell them. The stock market also provides information about companies, their products and business strategies to investors.
Private businesses might issue shares to help raise money, in which case the company becomes a publicly traded firm. This is known as an initial public offering (IPO). Private firms might also have shares that are owned only by employees, which doesn’t make them available to the stock market.
A key idea in investing is that a business is worth the discounted value of the stream of cash it will earn over the life of the business. If a business’s expected earnings are higher, then its share price will rise. Conversely, if the company’s expected earnings are lower, then its share price will fall.
On a second-by-second basis, the stock price reflects what buyers and sellers are willing to pay for it. This is why Benjamin Graham called the stock market a voting machine: On any given day, a particular stock’s price is determined by supply and demand.
The complex interplay of factors that influence share prices can make it challenging to predict how a specific stock will perform. Some of these factors include the news cycle, investor behavior and larger economic trends. Even experienced investors often struggle to select the right stocks for their portfolios. For new investors, it’s usually recommended to start with “blue chips”—shares of large, well-established companies that have a track record of stability during market fluctuations.
About the Author
