Back in the day, the stock market was nothing more than a place where investors exchanged physical pieces of paper called stock certificates. Each stock certificate represented a share of stock in its respective company. Today, stock certificates are a thing of the past, and everything has become digital.
Although the digital nature of the stock makes investing much easier and efficient, it can make things a bit more difficult to understand. What is a stock share? Here is a basic explanation.
Stock Market Basics
The stock market today is a digital exchange where investors buy, sell and trade shares of stock (which will be explained in greater detail). The supermarket is a term you may be familiar with, a location where you can buy common household goods and supplies. Walmart is a great example of a common supermarket.
The stock market is the central location where stocks are bought and sold. While you may be familiar with Walmart, a popular worldwide supermarket, there are many different markets or exchanges to buy and sell stock. The two main stock market exchanges are the NASDAQ (National Association of Securities Dealers Automated Quotation System) and the NYSE (New York Stock Exchange).
What Is A Share of Stock?
As briefly mentioned in the intro to this article, a stock share in the past was represented by a stock certificate. That stock certificate represented ownership in a business. These stock certificates could be bought and sold between investors.
Today in the digital age, stock certificates appear to be nothing more than a few numbers in your investment account. In reality, each share of stock is a digital form of what used to be a stock certificate. The share of stock represents ownership in a publicly traded company. Not all businesses are traded publicly.
Publicly traded companies are simply large businesses that have approved the buying and selling of shares of their company on a public market like the NYSE or NASDAQ.
When a company becomes large enough, they may decide to open up a portion of the company ownership to be owned by the general public. When this happens, it's known as an IPO or Initial Public Offering. The company determines how much will be available to buy and sell to the public, and the initial price it will start at.
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How is the price of a share of stock determined?
Once the stock has been issued to the public, it is then traded among investors who ultimately determine the price of one share of stock (ill explain this in greater detail a couple paragraphs down).
The a stock is sold for the first time in it's IPO, its said to be sold on the “Primary Market.”
Once its sold for the first time, its then traded on the “Secondary Market” on a public stock exchange.
This is similar to a car dealership. A brand new car with zero miles on it is first sold to its first customer at retail value.
A few years later that person may decide to sell their car to a dealership or another person.
The first sale of the car would be like the IPO of a stock being sold on the “Primary Market”, and the re-sale of the vehicle would be similar to trading stock on the “Secondary Market.”
The price of a share of stock sold on the Secondary Market is totally dependent upon supply and demand. The easiest way to explain this concept is to compare it to an auction.
At an auction, you have an auctioneer who presents the items being sold and their starting price. Lets say the first item being sold is a piano starting at $200.
What determines the ultimate sale price of that piano? The crowd of buyers at the auction of course. The ultimate sale is dependent upon how much one of the buyers in the crowd is willing to pay.
Recommended Reading: How To Invest In The Stock Market With Just $5 At A Time
Lets take two scenarios: A crowd of 10 buyers and a crowd of 100 buyers at the auction for the piano. At which auction do you think the piano will sell for more? The crowd of 100 buyers right? Why? Because the the higher the demand, the higher the price will be.
This exact same principle applies in the stock market, and its the determining factor in what price a share of stock is bought and sold for, but on a much….MUCH larger scale of buyers.
Conclusion: What is a stock share?
A share of stock is a representation of ownership in a publicly traded company. A company is publicly traded when its owners believe it to be beneficial to issue a portion of company ownership to the general public.
When a company decides to be publicly traded, it issues its stock shares on the Primary Market as an IPO, or Initial Public Offering.
After the IPO, the stock is then bought and sold on the Secondary Market through major stock market exchanges like the NYSE and the NASDAQ. The price of the stock when its sold on the Primary Market in it's IPO is determined by an evaluation from professional financial experts, and its price when sold thereafter on the Secondary Market is determined by how much someone is willing to pay for a share.
Stock shares represent a percent ownership in a publicly traded company, and thus can be great investments. Investing in individual stocks should be done only with professional help, or by someone with experience investing in individual stocks.
For most, the best way to invest in the stock market is through a diversified portfolio of hundreds or even thousands of companies. This limits your risk of a company going bankrupt and you loosing your investment.
Acorns is a leading investment bank that allows you to invest your spare change from your every day purchases, into a diversified stock portfolio. The portfolio is customized to your investing goals based on your response to a few initial questions.
Acorns also gives you expert advice and education on investing, making them a great place for both beginners and experts to diversify their portfolio.
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