The stock market can seem like a whole other language, with all its complex rules and jargon. But it’s important to understand what a stock market is, and how it works so that the thought of investing doesn’t seem daunting.
A stock market is a place where people can buy and sell shares of publicly traded companies. These companies raise money by selling shares to investors, who hope to make a profit as the value of the share rises.
To buy or sell shares, you need to have an account with a brokerage firm—these days, that’s usually an online broker. The broker then matches you with someone who wants to sell and another person who wants to buy, making the transaction happen almost instantly. The law of supply and demand determines the price of a share, which can rise or fall over time.
You can also track the market’s health with a stock index. These can be broad, such as the Dow Jones Industrial Average (DJIA) or S&P 500, or specific to a sector, such as technology or healthcare.
Many Americans invest in the stock market because it’s a way to potentially grow wealth over time. For example, if the S&P 500 rises 10% each year, that’s 10% more money in your pocket, after adjusting for inflation. That kind of growth can help fend off the creeping eroding power of inflation, or help you reach financial goals you might not otherwise have been able to achieve.