Chances are that you first heard about the stock market as a child. You heard the phrase “Wall Street” so often that you imagined it was some far-off, mythical place, like Oz.
But even as you grew up, went to school, and became gainfully employed, the stock market may have remained a mystery that you couldn’t wrap your head around. You might have known it was complex or that people could get rich from it, but you may not have a firm grasp on the idea of owning or trading shares.
What are stocks? How do stocks work?
What Are Stocks? How They Started
The stock market was started in the 17th century when European countries were increasingly engaged in international trading. Colonization of the American continents had started. Merchants were creating large-scale shipping businesses to make transatlantic voyages.
But this was prohibitively expensive. Single business owners couldn’t possibly afford all the capital they needed to fund their operations themselves. Some hit upon a plan in which outside parties could provide the funds they needed to keep business growing. In exchange, these outside partners would receive a share of ownership in the companies. As long as they maintained ownership, the partners would see their shares gain in value as the company grew.
The Dutch East India Company was the first business to offer paper shares in their shipping and export business in 1602. These shares made trading extremely easy. Investors could buy and sell their shares as they pleased. The concept took off, and soon other European companies were formed and built using funds provided by shareholders.
Trade with the New World and the rise of the Industrial Revolution supercharged the growth of the stock market. Companies needed more capital to trade with the Americas, and industrial companies needed more capital to build and expand their mechanical operations. Investors were beginning to see real profits from their partnerships.
Eventually, the stock market became such a big business that merchants decided they needed to be more organized about it. In 1773, businessmen in London established a marketplace at a local coffee house that they had been using as a meeting place for decades. They called it a “stock exchange,” and it became the model for similar ventures in America.
Propelled by the economic growth in the U.S. and the development of the New York Stock Exchange, the shareholder system quickly became the standard means of capital investment in developed countries across the world.
Soon, everyday people — rather than just wealthy individuals and institutional investors — were taking part in the stock market themselves. The stock market model has remained in place ever since.
How Does Selling Stock Work?
The times and methods of selling stock have changed and evolved, but the basic transaction remains the same. How does selling stocks work?
The owners of a privately held company decide that they want to grow their business through public funding. They go through all sorts of bells and whistles to get their company approved for listing on the stock exchange.
Once this happens, they set a price at which the first publicly available shares will be sold and launch the sale at an initial public offering (IPO). This is typically a big deal — often complete with party streamers and a few cocktails.
Investors then buy stock shares, most often through online brokerage sites. If a lot of shareholders buy the stock, the price usually goes up. If buying is slow, the value usually goes down. Several other outside factors can affect the share price, but trading volume is the most significant.
The company takes all of the money it earns through shareholders and they apply it to operations and business expansion. This includes mundane things like employee salaries, equipment, office leases, marketing, and so forth. It also includes more exciting things like new product lines, global growth, research, and development.
The shareholder gets a slice of ownership in the company. As long as they hold onto their shares, they’ll either earn or lose money as the stock price goes up or down. After the share price goes up to a certain point, the shareholder may decide to sell their shares and take the profits. Or they may decide to bail out if the share price goes down a lot and they don’t want to lose any more money.
There’s really not much more to buying and selling stock. You buy into a company, they take your money to build the business, you sit back and hopefully watch the value increase, and you get profits if and when you decide to sell your shares.
What time does the stock market open? The New York Stock Exchange and NASDAQ commence business at 9:30 a.m. EST on business days. What time does the stock market close? The major exchanges close down at 4:00 p.m. EST. Exchanges in other parts of the world are open during the business days for their respective regions.
How Do Stocks Work When I Own Them?
So you’ve decided you want in on the action. Terrific! Here’s how stocks work when you’ve got them in your portfolio.
Common Stock vs. Preferred Stock
Most shares that retail investors own are known as “common stock.” They’re called that because they’re the most commonly traded kinds of shares. That was easy, wasn’t it?
Common stock is the simplest, most hassle-free kind of stock. It represents ownership in the company. You have a vested interest in the company because you’ve bought into it and reaped a share of the profits (if any). You also get a say in how the company runs (more on that in a bit).
There’s another tier of share ownership called “preferred stock.” As the name implies, shareholders with this kind of stock get a little more preferential treatment than common stockholders. All this really means is that preferred stockholders get dividend payouts — if any — before those who have common stock shares. They’re also more likely to recoup at least some of their losses in case the company goes bankrupt.
Preferred stock is less volatile than common stock. The share price doesn’t go up or down quite as sharply as common stock does. It’s more geared toward investors who use their holdings as a form of regular income. Therefore, preferred stock is less viable as a source of long-term growth than common stock.
But for those who can afford to buy a lot of preferred stock, it’s possible to earn a tidy living through investments.
Value Stocks vs. Growth Stocks
Stocks are not universal, one-size-fits-all instruments. Some share prices break out quickly, then settle back down. Others don’t spike in value that often, but they may accrue profit over long periods. Both types can be of great use to you as an investor.
“Value stocks” are usually associated with established, long-time companies that have a commanding share of their market — Johnson & Johnson, Apple, 3M, AT&T, Amazon, and so forth. They keep on existing and earning money every year. They’re not likely to experience a huge, immediate surge in share price. But they’ll rarely experience significant drops in share price, either — if they do, they’ll recover more quickly.
Value stocks are solid things to have in your portfolio because they can provide a good foundation. They’ll sit there and quietly earn money over the long term without having to attend to them very often.
“Growth stocks” are a little riskier, but potentially more profitable. They’re associated with smaller companies that are poised to make market breakthroughs. For example, a growth stock could be a medium-sized IT company that manufactures tech components for 5G phones and is closing in on a big government contract. If everything goes as planned, their share price could go up very quickly, and you could make a mint.
Of course, it can also go in the other direction. The company hasn’t quite established itself as a dominant force, so they’re still basically unproven. That’s the risk. But many investors hang on to growth stocks for just long enough to gain a tidy profit. A series of well-maintained, closely watched growth stocks can be very beneficial.
Both value and growth stocks have places in your portfolio. It’s important to learn the difference between the two and to research each company thoroughly.
How Stocks Work in Your Portfolio
There are several different ways to approach stocks and strategize to grow wealth.
One way is passive: Buy shares and leave them alone. Just hold onto them in your portfolio. Over time, they should go up in value as the company thrives and expands. If you’ve picked a winning stock at the right time, you may find yourself with a sizable profit if the company turns out to be successful.
Then there’s the more aggressive, active approach. You’ll buy stocks expecting them to gain value fairly quickly. You’ll hold them until they reach a certain profit margin, then attempt to sell them and reap the gains. This strategy is far more hands-on, requiring a lot of careful attention, research, and risk tolerance.
Speaking of risk tolerance — that’s what keeps a lot of people away from the stock market. The fear of past stock market crashes and a wiped-out investment account is enough to make anyone uneasy. Investing carries a high level of risk by definition — it’s just part of the game.
How Stocks Work: Other Aspects of Being a Shareholder
The main point of owning stock is to build wealth. Especially for passive investors, there’s not much more to being a shareholder than just watching value appreciate over time. However, there are a couple of other things that being a shareholder may entail, depending on the ways that the companies you invest in conduct their business.
Stock Dividends
Many companies issue quarterly dividend payments to their shareholders. These payments represent a certain percentage of their earnings. Companies like Microsoft, Coca-Cola, and Exxon Mobil pay out stock dividends essentially as “thank you” rewards for investing in their companies.
Dividend payments can come in the form of physical checks or direct deposits. Some companies simply give their investors additional stock shares as dividends. A lot of investors set up their online brokerage accounts to reinvest their dividends in the companies that issue them; instead of taking the cash, they get an equivalent amount of additional stock.
Companies that choose to issue dividends are usually established, solid companies and steady, strong earners. They don’t have aggressive needs that require reinvestments or have alternate sources for funding those needs. Investors appreciate dividends because — well, it’s extra money. Some investors with thousands of stock shares basically live off of their dividend payments as regular income.
Other healthy, large companies choose not to issue dividends, including big guns like Apple, Amazon, Alphabet, and Tesla. They simply reinvest their profits in business operations and expansion. Their shareholders’ profits are strictly based on their holdings. Startups or smaller companies rarely issue dividends because they’re still growing.
Voting Rights
As a shareholder, you own a portion of every company you invest in. That means, believe it or not, you have a say in how the company is run. Granted, it’s a tiny say (unless you own millions of shares in the company). But it’s something.
Shareholders have voting rights in the public companies they invest in. These rights are weighted according to how many shares they own. At annual shareholder meetings, investors are invited to cast their vote on certain issues affecting the company: Board members, policies, proposed acquisitions, even the hiring or firing of executive personnel.
You can, of course, choose to attend the shareholders’ meeting in person. But that’s not feasible for those with stocks in dozens of companies unless they have frequent flier miles and a lot of time on their hands. Fortunately, your online brokerage will inform you if you have a vote coming up with a company you invest in and can link you to an online site where you can cast your vote.
Or you can just skip the whole voting thing. But it’s there if you want it.
What Is the Stock Market Like Today?
The stock market continues to operate as it always has. However, it’s also gone through transitional phases when both individual sectors and the larger economic ecosystem have faced the need to adapt. Thanks to technological advances, the stock market reacts much more quickly than it used to — which is both a good and a bad thing.
Here are some aspects of the stock market in 2024 that reflect that evolution.
Global Events
In the first part of the 2020s, the stock market was hit hard by the COVID-19 pandemic. The shutdown forced businesses of all sizes to cease or restrict operations, which led to a stock market crash in March and April of 2020.
Stimulus packages and aggressive action from the Federal Reserve helped the market rebound, and by August 2020, most S&P 500 commodities had regained their pre-COVID value.
Global conflicts, like the Russian invasion of Ukraine and the Israel-Palestine conflict, have also affected stock commodities in significant ways. The Ukraine invasion disrupted global supply chains, especially in the agricultural and energy sectors, as both countries have major interests in gas, oil, and grain.
The ongoing Israel-Palestine conflict has produced a surge in oil prices and may have accelerated global inflation that was present when the events of October 2023 prompted full-scale warfare. The fraught situation caused many investors to flock to “safe-haven” markets such as gold as a hedge against future losses.
Technology
Technological advances since the advent of the internet have made the world almost entirely different than it was 30 years ago. Today, technology has practically revolutionized the stock market.
Electronic trading platforms have been steadily improving since the last quarter of the 20th century. The development of electronic communication networks (ECNs) sped up the process, essentially decentralizing the marketplace and increasing trading volume in a big way.
Today, online brokerages are arguably the main portal for commodities trading. Their open availability has made it easier for everyday investors (sometimes called “retail investors”) to take part in transactions once reserved for more experienced and professional brokers.
Moreover, artificial intelligence (AI) input and algorithmic trading make it easier for traders to execute transactions and increase liquidity. Depending on who you ask, that may or may not be a good thing.
At Gorilla Trades, we prefer to take the optimistic view that new technologies will prove to be a boon to individual investors in the coming years.
Investor Sentiment
Though we always recommend investors leave emotions out of their trading decisions, it can nonetheless be useful to know how investors are feeling and the impact they have on the marketplace.
In general, investor activity in 2024 is cautiously picking up after a more subdued 2023. Many are investing in assets that have declined in overall value but may have a second chance in the near future.
Real estate investor sentiment has seen a jump in 2024 as more investors snap up distressed properties for fix-and-flip purposes. Two-thirds of real estate investors are convinced the marketplace will continue to advance, while only 14% predict a downturn.
Regulatory Changes
International regulators have focused on making the stock market more transparent and focused on protecting investors. In 2024, regulatory agencies will be more active in incorporating AI, core competency, and increasing liquidity into their outlooks.
Regulators are adopting new data, surveillance, and enforcement measures, and investors are well-advised to keep up.
Generational Changes
One of the biggest recent shifts in the stock market is the age at which the average investor begins taking part in the commodity exchange.
According to CNBC, the average investor from Gen Z, the generation born between 1997 and 2012, got started at age 19. This is a stark contrast to baby boomers, who by and large began investing at age 35, and even millennials, who jumped into the market at an average age of 25.
Technology has surely played a role in this generational shift. Despite the newfound ease of trading, however, young investors should take a disciplined approach to the stock market, relying on advice from financial experts rather than getting swept up in fad investments or social impulses.
Economic Factors
The last few years have seen more frequent changes in the Federal Reserve’s interest rates after years of near-total non-movement. While higher rates make it more expensive for lenders to get capital, corporate earnings among inflation and higher interest rates generally improve.
As of July 2024, interest rates have more or less settled, at least for the time being. This has reduced the pressure on stocks as the marketplace has had time to adjust to the current rates.
Financial professionals recommend preparing for the eventuality that interest rates will decline at some unspecified point in the future. But for now, the market is mostly steady.
Top Business Sectors and Regions Today
So far, technology has been the top-performing business sector in 2024, gaining around 16.76%. The development of AI has a lot to do with this, as does the growing market of component manufacturers like Nvidia (NASDAQ: NVDA).
Across the globe, interest in India’s rapidly developing economy has increased. The Indian marketplace has gained 16.35% this year, faster than every other economy in the world. North America is second, with a growth rate of 12.6%.
Global equity markets, mutual and exchange-traded funds (ETFs), and global emerging markets continue to command a bigger slice of the investment marketplace as more individuals enter the investment arena.
Going Forward
The stock market’s future hinges on the continued stasis of federal interest rates, which have seemingly leveled out for the time being.
As successful as the technology sector has been, there’s every reason to think the revolution is nowhere near finished. Indeed, advisors expect major tech players like Microsoft, Apple, and Amazon to continue growing with no observable end in sight.
Gorilla Trades: Taking the Mystery Out of Stock Market Success
Gorilla Trades helps everyday investors to understand how the stock market works. We offer data-driven stock picks and show you how to trade them for maximum profit — no mystery about it. To learn more, sign up for a free trial.
