The Stock Market

Someone asked me about the stock market. Here is what I told them:

A corporation is a way for many people to own one company. Of course different people can own different amounts of the company. The way this is kept track of is with shares called stock. So if you own 50% of the stock shares of a company you own 50% of the company.

The stock market is a way to buy and sell shares in companies. You can not buy stock in any company. Some companies (like Chick-fil-A) do not sell shares to the public. These are called private companies. You can buy shares in public companies on the stock market, and when you buy shares you are a real owner in the company although your percentage is likely to be very small.

The way the stock is identified with the company is by its stock symbol. The symbol for Apple Computer is AAPL. The symbol for Google is GOOG. If you simply type the symbol in Google search you will get lots of information about the company and the stock.

So how much is stock worth? The short answer is that it is worth the profits that it pays you. When a company takes money and gives it to the owners that is called a dividend. Obviously raising the dividend is good and lowering the dividend is bad. When you but a stock you can compare the dividend to the return on a savings account and determine if it is a good investment or not.

Unfortunately the above paragraph is incomplete. The better answer to what a stock is worth is that like all markets it is worth what someone is willing to pay you for it. Thus, Google stock which pays no dividend is still worth lots of money because everyone loves the company. The idea is that the company will continue to grow fast and rake in the money, and that at some point down the road the owners will either get that money, or be able to sell the stock to someone else who thinks it will generate even more money.

So as you can see it is not an exact science. However it is not purely random. You may notice that everyone has an iPod or uses an Apple computer when they have a choice, and so it is not surprising that Apple stock has been doing well lately.

If you are interested in learning more about the stock market what you should do is give yourself a sum of fake money, say $100,000 and do some research on various companies, and then buy some stock and keep track of your trades and see how well you do. I think there are even web sites that will do this for you.

I would also recommend reading the Investors Business Daily newspaper.