You’ve heard about the stock market your whole life. Here’s what’s actually happening when you buy a stock — in plain English.
What a stock actually is
A stock is a small ownership stake in a company. When a company wants to raise money, it can divide itself into millions of tiny pieces called shares and sell those pieces to the public. When you buy one share of Apple, you literally own a tiny fraction of Apple — its profits, its assets, and its future growth.
If Apple does well and grows, your share is worth more. If Apple struggles, your share is worth less. As an owner, you participate in the company’s success or failure.
How stocks make you money
Two ways:
- Capital appreciation. The share price goes up over time. You buy at $100, it rises to $150, you’ve made $50 per share.
- Dividends. Some companies pay a portion of their profits directly to shareholders, usually quarterly. If you own 100 shares and the dividend is $1/share per year, you receive $100/year just for owning the stock.
Why stocks go up and down
Stock prices change constantly based on what investors collectively think a company is worth. Earnings reports, news, economic data, interest rates, industry trends, CEO changes — all of it influences price. In the short term, stock prices can be wildly irrational. Over the long term, they tend to reflect actual business performance.
Individual stocks vs index funds
Buying individual stocks is risky — a single company can go bankrupt and you lose everything you invested. Most financial experts recommend index funds instead, which spread your investment across hundreds or thousands of companies at once. The S&P 500 index, for example, holds the 500 largest US companies. If one fails, the other 499 keep your portfolio going.
Index funds are how most ordinary people should invest in stocks — diversified, low cost, and historically one of the best long-term investments available.
The long-term case for stocks
The US stock market has returned an average of about 10% per year over the last 100 years (about 7% after inflation). That means $10,000 invested and left alone for 30 years grows to approximately $174,000 at 10% average returns. No other asset class available to ordinary investors has matched that consistently over long periods. That’s why stocks are the foundation of virtually every retirement savings strategy.