What is the Stock Market?

Wall Street sign on wallEventually, just about every company needs to raise money whether to hire employees, build a new factory, or purchase machinery.

They have two choices:

1) Borrow money from a bank

2) Raise it from investors by selling them a stake (issuing shares of stock) in the company.

Most companies in which a client might consider buying stock are listed on a major exchange such as the New York Stock Exchange (NYSE), the NASDAQ or the American Stock Exchange. In the past, most investors’ choice to authorize trades were through using a stockbroker, but today most trading is executed electronically. Meaning you can simply log onto your computer that’s sitting on the desk in your bedroom, place a trade tonight, and you’ll possibly know the result of your sell or purchase by trading time the next business morning. Simply marvelous!

What are the indices or indexes like the S&P 500 or the Dow Jones Industrial Average? There are more than 5,000 listed companies in the U.S. that are actively traded. But you need to understand that companies come and go. Baskets of companies are assembled and tracked as a group called an index. For example, the Dow Jones Industrial Average (DJIA) has 30 companies. The Stand & Poor’s 500 (S&P 500) has – you guessed it – 500. Following a basket of shares is easier than following every listed company. Purchasing individual stocks can be quite risky and expensive if one does not know what they are doing. It is a good idea to have at least some knowledge and experience before purchasing large amounts of shares. In some cases, it may be an ideal decision to look into purchasing an index like an S&P 500 fund or Dow Jones 30 fund. In this situation, it is like owning all of the 500 companies of the S&P 500 or the 30 companies in the Dow Jones. In most cases, this is less risky and potentially less expensive. Look into indexes!