How I Wish Someone Had Explained the Stock Market To Me

photo taken from google images

Until very recently, I had zero interest in the stock market. I was confused by it, thought that it was mostly for and run by men, and felt like it was just this huge risky weird thing and that I was better off keeping my money in a (metaphorical) box under my bed. My exposure to the stock market was pretty much limited to what I saw in movies like “The Wolf of Wall Street” or “The Big Short” (and even when I watched those, I was highly confused/turned off to trying to understand it). I knew the stock market had “crashed” at some point in my life (2008) and that a lot of people were mad about it because they lost a lot of money. That’s pretty much it.

When I first started getting curious about the stock market, I would literally google “what is the stock market?” and just read what I found (often until I had a headache). Some of it was helpful, some was super confusing. A lot of it had jargon and language that I also had to google (left me with many tabs open and feeling tired).

This post is not me trying to convince you to invest in the stock market (but I will write posts like that later because I DO think you should pay a robo advisor like Ellevest or Betterment to expose you to the stock market), but rather me trying to demystify it a little bit and put it into terms that are sort of easier to digest.

Okay yeah so what is the stock market?

The stock market is like a huge-ass, online department store filled with businesses. For the purposes of this quick intro, let’s just talk about publicly owned companies (this literally means companies that are owned by the public aka anyone can buy into them).

Why would a company decide to be publicly owned and part of the stock market?

A company sells it’s stock as a way to pay for it’s business. Let’s say you are starting a business. You figure out that it will cost $50,000 to start up but you only have $25,000. Rather than borrowing the remaining $25,000 from the bank (you would have to pay interest on the money you borrowed and be totally responsible for paying it back), you decide to make your business a “publicly held company.” In this model, people who believe in your business and feel excited about it’s future can buy stock in your company to help fund it.

This is good for the company because it’s basically no strings attached. If they do well, they earn money and so do the people who invested their own money (bought stocks) in them. If they fail and shut down, they don’t owe any money to the people who invested in them.

But how do people make money in the stock market?

Let’s pretend the business you’re investing in (buying a stock of) is a pizza pie. You invest in this pizza pie by paying for one of its slices (one slice = one stock). Let’s say it’s a very unique, shrimp-topped pizza. In the beginning, this shrimp pizza is valued at $10. The pizza has 5 slices, or shares, so each share is valued at $2. You buy a $2 slice of the shrimp pizza pie. A month after you buy your share, people start hearing about how delicious this shrimp pizza is and it gets more popular. The value of the pizza then goes up to $100. Each of the five slices is now worth $20. Two weeks later, a bunch of research comes out saying that shrimp is bad for you. People lose interest in the shrimp pizza and the value goes down to $5. Now each share is only worth $1.

To make money in the stock market, you want your shares in whatever company or companies you’ve invested in to go up over time.

I want to give a disclaimer: I am not a financial advisor and I have no formal schooling on this topic. This is certainly not me advocating for you making choices about what stocks to invest in based on whether or not you personally think they will go up. There is a ton of research (I will definitely write more on this later) that shows that this method (it’s called “stock picking”) is HIGHLY ineffective. I just use this example to make clear the way that stock value operates and fluctuates.

I sort of get it but I need a quick recap or TLDR (too long, didn’t read):

Sure!

The stock market is like a huge online department store that sells pieces aka shares of businesses.

Businesses can decide to “go public” and let anyone buy shares of their company.

When the value of the business goes up (could happen for a number of different reasons), the value of the individual shares also goes up. Same goes for down.

People make money in the stock market when the amount they buy a share for is lower than what they eventually sell it for.

What questions do you have? Share below!