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Have you ever wondered what the stock market is and how it works?
When people buy stock, they actually buy a small portion of a company (like Mattel, Kellogg’s, Nintendo, Disney or Apple), and when they perform well, the stock becomes more valuable. When companies do poorly, however, stock value declines. When you sell a stock whose value has increased, you make a profit. When a company underperforms, the stock’s value can fall. Selling the stock at that point would mean you lose money.
When a person pays money to buy one or more stocks for a
company, they become a shareholder. This means that they own at least one stock of that company and, therefore, own part of the company. Their part may be very small or it might be large, depending on how many stocks they own.
When a person buys stock in a company, this gives the company money to make improvements in the business. The company might be able to hire more workers, or it might be able to afford to research the latest and greatest technology so it can create new products.
And why would a person want to buy stocks? Well, it’s pretty cool to have some ownership in a company. But the main reason is to make a profit, or financial gain. Let’s say you buy stock in a video game company for $100. You hang on to your stock and watch the market carefully. You decide to sell your stock to another person, but now its value is $150. You’ve just made a profit, meaning you earned an extra $50 in addition to what you initially spent.
Investing can be a powerful way to create wealth over the long term that helps people save for goals, such as going to college, buying a house or retiring from work.
Over the long term, average stock market returns can be much higher than the interest your money earns in a savings account, so it can be a way for people to build wealth fast enough to achieve these big goals.
