If the thought of investing in the stock market scares you, you are not alone.

Individuals with very limited experience in stock investing are either terrified by
horror stories of the average investor losing 50% of their portfolio value—for
example, in the two bear markets that have already occurred in this millennium—or
are beguiled by "hot tips" that bear the promise of huge rewards but seldom pay
off. It is not surprising, then, that the pendulum of investment sentiment is said
to swing between fear and greed.

The reality is that investing in the stock market carries risk, but when approached
in a disciplined manner, it is one of the most efficient ways to build up one's net
worth. While the value of one's home typically accounts for most of the net worth
of the average individual, most of the affluent and very rich generally have the
majority of their wealth invested in stocks.1 In order to understand the mechanics
of the stock market, let's begin by delving into the definition of a stock and its
different types.

KEY TAKEAWAYS
Stocks represent ownership equity in the firm and give shareholders voting rights
as well as a residual claim on corporate earnings in the form of capital gains and
dividends.
Individual and institutional investors come together on stock exchanges to buy and
sell shares in a public venue.
Share prices are set by supply and demand as buyers and sellers place orders.
Order flow and bid-ask spreads are often maintained by specialists or market makers
to ensure an orderly and fair market.
Listing on exchanges may provide companies with liquidity and the ability to raise
capital but it can also mean higher costs and increased regulation.
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How The Stock Market Works
What Is a Stock?
A stock is a financial instrument that represents ownership in a company or
corporation and represents a proportionate claim on its assets (what it owns) and
earnings (what it generates in profits). Stocks are also called shares or a
company's equity.

Stock ownership implies that the shareholder owns a slice of the company equal to
the number of shares held as a proportion of the company's total outstanding
shares. For instance, an individual or entity that owns 100,000 shares of a company
with one million outstanding shares would have a 10% ownership stake in it. Most
companies have outstanding shares that run into the millions or billions.