How the stock market works

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4 Minutes Read

A simple guide for new investors (or anyone who needs a refresher). 

So, you’ve heard that investing can be a great way to grow your savings…but everything you find on the subject literally sounds like it’s been written in a different language. So many abbreviations! And what does it even mean to invest in a stock? 

 

Stock Talk

At a basic level, when you purchase stock in a company you are exchanging your money for a piece of that company. Why would you do this? Because owning a piece of a company gives you an opportunity to benefit from that company’s success (we’ll explain in a sec, don’t worry). Meanwhile, companies sell stocks to raise money that they can use to run their business. 

The amount of stock you own is measured in shares. A company will only issue so many shares at a time, so the number of shares you own, compared to the total number of company shares owned by anyone, will tell you how big your piece of the company is. For example, if you own three out of 500 shares, that’s 0.6% of the company. 

Still with us? Ok, good.

So, remember when we mentioned benefitting from a company’s success? There are a few different ways to do that – and generally, the larger your piece of the company, the more you’ll benefit. Two main ways investors make money are:

  1. Dividend payments. Some companies pay out dividends to their shareholders (people who own shares in the company). This means that you could get regular payments – usually four times a year – just for owning stock. The money for these payments typically comes from a company’s profits, and the amount will vary from company to company. Also, not every company chooses to pay dividends – it’s usually the big, established companies that make this move.

  2. Selling your shares for a profit! Stock prices can go up and down on the stock market (we’ll get into why prices change in just a moment). You might buy $100 worth of stock in Company A and then sell it five years later for $1,000 – resulting in a profit.

Think about it like this: you find a cool oil painting at a thrift store and buy it for $5. Five years later, it turns out the painting was created by a famous artist and is now worth $5,000. In this example, the market value of your property has changed, and if you were to sell it, you would make money. 

That’s essentially what happens when you sell stock and make a profit. Of course, sometimes stock prices can go down, and you may end up with a loss when you sell – getting less for the stock than what you originally paid for it.

Stock Exchange 

Now you understand what a stock is, but how do you actually buy it? You can’t walk to the corner store to purchase stock – it’s bought and sold using a system called the stock exchange. For example, you’ve probably heard of the New York Stock Exchange (NYSE). This is one of several stock exchanges – basically, stores for stocks. 

Before you can buy stock, a company needs to list that stock on an exchange (the same way a product needs to be available at the store before you can buy it). This is a lengthy process called an Initial Public Offering or IPO. On IPO day, a predetermined number of shares become available on an exchange like the NYSE, and the public (hopefully) buys them. From that day forward, those public shares are typically bought and sold between ordinary investors like you or me – at this point, the company isn’t personally participating in the trade. The stock exchange’s job is to essentially connect someone who wants to buy shares with someone selling those shares.

Now, you aren’t going to call up Wall Street whenever you want to purchase shares. Enter, advisors and stockbrokers – or digital investing apps like Flahmingo – who take your request to purchase shares and actually make it happen.  

 

Stock Market

The ecosystem of buyers and sellers trading on stock exchanges is called the stock market. This is the term used to describe all of the trades taking place, while stock exchanges are how the trades take place. Using the concept of the stock market to think about how everything works together can be useful, because it allows you to spot patterns – and maybe even predict where stock prices are headed…

We mentioned that stock prices go up and down. While there are many factors that can contribute to changes in stock prices, we’ll focus on supply and demand for today. If there are a lot of people who want to buy a stock, and not that many people who want to sell that stock, the stock price will go up. When something is in high demand, people are willing to pay more for it. 

But if the market is not interested in a stock, there may be more people who want to sell it than who want to buy it. In this case, the stock is in low demand, and its price will go down. You can’t exactly charge a ton of money for something no one wants, right?

Now, back to the idea of spotting patterns. There are a lot of reasons investors may or may not want to buy a stock – and these reasons might apply to a whole group of stocks, not just one. Stock market indexes look at the performance of a bunch of stocks bundled together. For example, the S&P 500 tracks the performance of the top 500 companies in the U.S., so it offers a pretty good idea of where the market is at overall

 

Fractional Shares

This all makes sense in theory – but how would you actually buy shares on an app like Flahmingo?

Flahmingo offers something called fractional shares, which represent a portion of a company that’s even smaller than one share. On the Flahmingo app, this means you can invest in any company or ETF with as little as $1 USD.

For example, you might have $100 to invest in Company A – but their shares are listed at $150 each. The option to invest fractionally means you could still own $100 worth of Company A – you will just own less than a full share (you would own 66.7% of a share, to be exact). Without the option to buy fractional shares, you would have to buy at least one full share – which can cost a lot of money. Make sense?  

When using Flahmingo, you can buy and sell fractional shares of more than 2,200 ETFs and publicly traded stocks. You just specify the companies you want to invest in, and the amount you would like to invest – and Flahmingo will do the rest!

 

Let’s keep it simple. 

By now, you know:

  • Owning a stock is like owning a piece of a company 
  • People buy stocks with the hope of benefitting from a company’s success
  • Stocks are bought and sold on a stock exchange
  • Supply and demand causes a stock’s price to go up and down
  • This whole system is known as the stock market 
  • You can invest in fractional shares using the Flahmingo app

These are just the basic ingredients you need to begin your empowered investing journey. From here, there’s always more to learn – but we hope this cleared a few things up!

Ferron Guerreiro

Author