What is a Stock?

Stock is a piece of ownership of a company. When a company needs extra money to

help grow their business (like maybe they want to go from 1 store to 100 stores), they
can sell some or all of the ownership of the company in the form of a stock offering.
They may want to raise $100,000,000 and if the hire an investment banking firm on
Wall Street to help value the company, set the initial price of the stock, and then sell
the shares to the public. So if you were to buy 100% of a companys stock, you would
own the whole company. If you own stock then you also get to vote on major decisions
of the company. Keep in mind though that each share gets one vote so if you only own
100 shares and the company has 100,000,000 shares outstanding your vote is only
worth so much. Over the last 100 years, owning stock has, despite the markets ups
and downs, been the best way to invest your money over the long term.
What is a share?
A share is one individual piece of stock. Most companies have millions and some of the
larger companies have billions of shares issued. So if you only own 100 shares you
would own a very tiny percentage of ownership of a company. It is, nonetheless
ownership of the company.
What is the Dow Jones or the DJIA?
The Dow Jones Industrial Average (often referred to as the Dow) is composite number
that represents the share prices of 30 U.S. blue-chip stocks. The DJIA is the most
well-known market indicator in the world and was created in 1896 by Dow Jones &
Company, which is actually a publicly-traded company (DJ) on the New York Stock
Exchange (NYSE). They produce many important business publications including The
Wall Street Journal, Barrons, and several stock indexes. There are other indices, as
you will read below.
What is the Nasdaq?
The NASDAQ refers to two different things. First is the largest electronic stock market in
the U.S. the National Association of Securities Dealers Automated Quotation System.
Second is the popular stock index called the NASDAQ Composite Index. It measures all
domestic and international stocks listed on The NASDAQ, which number over 3,000. It
was started in 1971 and is now one of the most important stock indexes.
What is the Big Board?
The Big Board is another name for the New York Stock Exchange.
What is the S&P 500?
The S&P 500 is a stock index published by Standard & Poors. It measures 500 U.S.
stocks that are supposed to be representative of the overall stock market. It was
created in 1957.
What determines a stocks price?
There are many factors that play into a stocks price. Overall, though, the price is
determined by investors perceptions of what the stock is worth.
Some of the biggest factors include:
How big and successful the company is (especially its earnings)
Recent company news
The state of the U.S. and world economies
Whether there is a bull or bear market
World events, whether good or bad
For more information, see our Stock Prices page.
What is a bull market?
A bull market occurs when stock prices are rising faster than their historical averages.
It can last months or even years. It is the opposite of a bear market.
What is a bear market?
A bear market occurs when stock prices are falling faster than their historical averages.
It can last months or even years. It is the opposite of a bull market.
What is a market crash?
The market has crashed when stock prices have dropped dramatically. One of the
worst crashes was Black Tuesday, which occurred on October 29, 1929 and led to the
Great Depression.
What is insider trading?
Insider trading occurs (1) when an insider to a company, such as an officer or someone
who owns a large percentage of the company, trades the companys stock. This is legal
and acceptable, as long as that person is not trading based upon non-public company
information.
Insider trading also occurs (2) when anyone, including employees, trades using non-
public company information. This is considered illegal.
How much money do I need to get started?
These days, you can open an online account with a brokerage with as little as $5. When
you purchase stocks, your brokerage will generally charge you a commission fee of $5-
25, depending on the type of brokerage and type of order you place.
What is the Bid price? What is the Ask price?
When you request a quote for a stock, you will receive the bid price and the ask price.
The bid price is the best (highest) price you might receive if you sell your stock back to
the market. The ask price is the best (lowest) price you might receive if you buy stock
from the market.
You are not guaranteed to get these prices because the market fluctuates constantly
and prices change quickly. Also, if you buy (or sell) shares of a low-volume stock, you
run the risk of affecting the price due to excess demand (or supply).
Will somebody always buy my stocks when I sell them?
No. If you try to sell more shares than people are willing to buy or if your price is
unreasonable, it may take a long time for them to sell, if at all. However, if you use
market orders on medium or high volume stocks you should not have any problems
selling them immediately.
What is day trading?
Day trading is the process of buying and selling the same stock during one day.
Professional day traders commonly trade many times per day. More Details.
When is the market open?
U.S. markets are usually open 9:30am-4:00pm Eastern time, except on holidays.
How much return can I expect?
Historically, the market has advanced roughly 10% per year. Of course this rate
fluctuates constantly. For instance, it may grow up 30% one year, then fall 20% the
next year.
How do I know which stocks to buy?
That is a great question. With over 8,000 different stocks to choose from, it can be
overwhelming to pick some possible winners.
Many people simply buy stocks that are recommended to them by their brokerages,
their friends, or experts from TV, magazines, and newspapers.
Some people buy stocks from companies they think are big, stable, and successful. This
may seem like a safe route, but there are no guarantees.
Other people buy stocks based on rumors that the price will rise/fall sharply soon.
Many experienced traders watch financial news on TV, read the relevant newspaper
stories, and investigate companies that are in the news. They also use technical
indicators, which are numbers or graphs which may help indicate whether a stock will
rise, fall, or stay the same.
A few people will randomly pick stock symbols by throwing a dart at a newspaper, for
instance.
What is a mutual fund?
A mutual fund is a fund created by an investment company which combines money
from many investors and invests it in a group of stocks, bonds, or other investment
vehicles. The investment company actively manages the portfolio to meet a desired
goal, such as long-term growth or steady dividends. One major benefit is
diversification. Many mutual funds also charge a fee when someone buys or sells
shares.
When someone buys shares of a mutual fund, they are not directly buying shares of the
underlying companies. Instead, they are entitled to a proportional amount of the funds
profits, which are usually distributed two or three times per year.
What is a mutual funds N.A.V.?
The Net Asset Value (NAV) is the current price of a mutual fund, which is calculated at
the end of each business day. It is the total value of the funds assets minus its
liabilities and divided by the total number of shares outstanding. It is similar to a
stocks closing price for the day.
What is a 401(k) plan?
A 401(k) is a type of personal pension plan that is offered by many employers.
Employees contribute part of their salary (before taxes) and employers commonly
match part of the contribution. The bulk of the plan is usually invested in mutual funds.
What are the main ways to make money with stocks?
Buy Low, Sell High (traditional long trading)
Sell High, Buy Low (short selling)
Dividends
Options trading
Futures
What is short selling?
Short selling is the act of selling stock that you dont own at a high price by borrowing it
from a brokerage and then buying it back at a lower price in the future. The hope is
that the stock price will drop in value and a profit can be made. This is an advanced
technique that has strict requirements and higher risks.
What is a dividend?
A dividend is money that a company gives to its shareholders when it has extra profit.
Since the shareholders own the company, they deserve its profits. However, sometimes
companies want to use these profits to help grow their business and decide not to
distribute dividends, at least for a while.
What is the P.E. ratio?
The Price to Earnings ratio is simply the price of a companys stock divided by its
Earnings Per Share. It is often used as an indicator of whether a stock is overpriced,
underpriced, or on par. The PE ratio by itself is not always enough to make a good
determination but it can be helpful to compare it with other companies in the same
industry. The NASDAQs average P/E is about 35.
What is a stock split and a reverse stock split?
A stock split is an increase in the number of outstanding shares of a stock. The price of
the stock is immediately adjusted so that the total equity remains the same. For
instance, if a $100/share stock splits 2 for 1, there will be twice as many shares but
they only be worth $50 each now. This is usually done to make the stock more
affordable to the public.
A reverse stock split is a decrease in the number of shares. This is usually done to raise
the price per share to meet stock exchange requirements or simply to look more
healthy.
What is an IPO?
When a company issues stock to the general public for the first time, it is called an
Initial Public Offering. The SEC has strict guidelines on how this is carried out. The
company can issue more stock in the future, which is called a Secondary IPO.
What is Dollar Cost Averaging?
DCA is the act of buying the same dollar amount of a stock each month. This allows you
to buy more shares when the stocks price is low and fewer shares when it is high. It
can often be more successful than buying the same number of shares each month.
What is a penny stock?
Less than $1 (or $5 in some cases) per share.

What is a small-cap stock? Mid-cap? Large-cap?
These terms refer to a companys market capitalization, which is the number of
outstanding shares times the stocks price.
Small cap: $250 Million to $2 Billion, approximately
Mid cap: $2 Billion to $10 Billion, approximately
Large cap: $10 Billion and up, approximately
What is a Blue Chip stock?
It is the stock of a large company that has a long history of stable operation and solid
stock performance. A great example is General Electric.
What is the SEC?
The Securities and Exchange Commission (SEC) is the government agency responsible
for protecting investors by monitoring and regulating brokers, dealers, and the stock
and bond markets in the U.S. They also make sure publicly-traded companies disclose
the required business details to the public.
What is a Margin Account?
A margin account allows you to quickly and easily borrow money from your brokerage
to purchase additional shares. In other words, it provides leverage for your account. It
also allows you to do short selling. Of course interest is charged interest on any
borrowed money and the SEC has very strict regulations on these accounts.
Practice stock trading with our free stock market game! Playing our stock game
is a great way to learn the stock market.