How Does The Stock Market Work? | Jessie's Notes for Beginners

The stock market can seem like an incredibly complex entity, especially if you're a newcomer like me, so let's break it down together and make it as simple and relatable as possible.

What Is The Stock Market In Simple Terms?

Simple answer: a digital marketplace where you buy and sell stocks and other securities.

Analogy answer: Think of the stock market as a second-hand shop - just like one of those resale stores or apps where you try to sell back something you initially bought from a brand store - except you buy and sell stocks (ownership pieces of publicly traded companies). 

Places like Plato’s Closet, Poshmark (my closet), Depop, or Rebag - where you can sometimes even sell an item you own for more money than you originally paid for it - based on supply and demand. Sometimes you sell it back for less or just trade it in for something else.  

What is a stock?

A stock is just a small piece of a company that you can buy in hopes that the company grows and the value of that stock goes up in value, so you can make money off it later. See Jessie’s Notes On Stocks!

When you buy a stock on the secondary market, you’re not actually giving that company/brand your money. It’s more like you’re buying it second-hand from someone else who wants to sell their share of stock to you. The key difference is that when you own a stock, you own a piece of that company, and you get voting rights!

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Understanding Stock Market Basics: Primary and Secondary Market

What is the Secondary Market? 

A place where investors, like us, can buy and sell securities (stocks, bonds, ETFs, etc.). Basically what we call “The Stock Market.” 

Much like buying something second-hand from a consignment shop or resale app like Depop/Poshmark/Rebag, you’re buying the security from the secondary market, from someone else who previously bought it on the primary market (or even the secondary market) - not directly from the company - with the intention of later making a profit if the company does well and their stocks go up in value. 

Much like when you sell a piece of clothing you bought from a brand store on a resale platform, sometimes for more than you initially paid because supply & demand or the brand reputation has made the item more valuable - congrats! That's what we call capital appreciation.

Ok, Then What is the Primary Market?

The Primary Market is like when you go to a store or a brand’s website online and buy a product directly from that company, giving that company money. Ok, there are a few differences in this analogy. For example, stocks are only sold by a company ONCE in the primary market after they’ve gone through a process where they are able to have an IPO (initial public offering) in order to raise capital.

You can learn more about this process from the Episode Equity for Ep 03 of the Market MakeHer Podcast.

Understanding How We Measure The Stock Market: With Indexes

What is a Stock Market Index (or Indice)?

First of all, it’s pronounced in-dih-see (I was embarrassingly pronouncing it as “in-dice”), and secondly, they’re the same thing. It basically tracks the performance of a certain set of stocks. And the index/indices themselves make the rules on what the requirements are to be able to make it in that index and stay there. So the stocks that are in each index can totally change over time. Like how different credit cards have different requirements for you to be able to get them. 

We frequently hear about three major indexes: 

• Dow Jones Industrial Average (DJIA)
• S&P 500
• NASDAQ

DJIA 

• 30 stocks 
• Some of the biggest companies, fun fact: stocks with the highest price can move the index the most. This is called price weighted.
• Small fraction of the market 
• not a good gauge of the market’s overall performance, more domestic (US) 

S&P 500 

• 500 of the largest stocks in the world
• Broad based - better gauge of the market 
• Market Cap Weighted

NASDAQ

• Primarily tech-heavy - has broadened out over time
• Over 3600 stocks
• Mostly in the technology sector

Remember, companies can be listed on multiple indices if they meet the specific requirements.

Points

When you hear something like “the S&P 500 is up 100 points” - points means dollars.

Are there more than 3 indices?

Yep! There are hundreds of them. And they make up all kinds of stocks and securities. 

What are these ETFs and Mutual Funds that I always hear about?

We’ll learn in Episode 04 that you can also buy a fund (like a mutual fund or ETF) that mirrors an index like the S&P 500. 

You can’t just buy an index…well, you could try to individually buy all the stocks that might be in an index and keep up with it as those stocks change, but that would be pretty expensive. You can buy a “mirror” of an index, like the NASDAQ, Dow Jones, or S&P 500, however, in a fund and someone will be making sure it keeps up with the changes in that particular index. 

And these cost way less than buying each of those individual stocks, but you don’t get voting rights and there are usually small fees involved. The good news is that if you don’t have a lot of money to start investing and you want to buy more than one stock, you could buy an ETF or you can even purchase a fractional share of a stock that is expensive. 

The Differences Between Confusing Terms

Stock Index vs Stock Exchange

This Stash article does a great job of breaking it down., but basically, a stock index is a way to measure a set of stocks, a sector, or how the stock market is performing in general (like the S&P 500) and a stock exchange is where the stocks are bought and sold.

Stock Market vs. Stock Exchange

The terms 'stock market' and 'stock exchange' can sometimes be confusing. But think of it this way: if the World Wide Web is the stock market, then a domain registrar like GoDaddy or Google Domains is a stock exchange. It helps you list your website (or stock) on the internet (or stock market), and people can then access it via different browsers (or brokerage firms).

See now this is where I got confused again. Because the NYSE and NASDAQ are indices/indexes, but they are ALSO stock exchanges. 

Explain It To Me Like I’m a Marketer (because I am one)

Let’s say a website is a stock and I want to put my website on the good ol’ World Wide Web (the stock market). After I’ve gone through my IPO process (building the website, designing/coding it and whatnot) I need to list it somewhere that can host the transactions of the stocks to individuals, so use a domain registrar like GoDaddy or Google Domains (stock exchanges like NYSE and NASDAQ) to get it listed on the internet with a web address (on the stock market with a ticker symbol) and then people can pick the browser of their choice like Chrome, Firefox, Safari (a brokerage firm) to go find the website and look at it!

How Do Consumers and the Government Influence Stock Market Performance?

To learn more about how consumers (us) and fiscal policy (the government) influence the value of the stock market, check out the Episode Equity on our Episode 2 page!

We, the consumers, have a significant impact on the stock market. If more people are willing to buy a product from a company, its stock value should go up, and vice versa. This consumer behavior is influenced by fiscal policy, which includes government decisions that affect us, and monetary policy, which involves the regulation of money supply and interest rates by the central bank.

To learn more about how consumers and fiscal policy influence the value of the stock market, check out our first Stock Market Update.

The People Have The Power!

You ultimately get to decide what you do with your hard-earned money and which companies you spend it on. You don’t have to give it to the biggest companies out there if you don’t believe in them, and you don’t have to buy their stocks either (even though we now know buying a stock on the stock market doesn’t give the company any money directly, but it does mean you are invested in how well the company profits and performs).

We truly have the power to make big changes in the world of investing and could easily stop supporting the big corporations that are profiting off of everything and everyone, but it would take a lot of us and we might not profit from it right away (or ever). The stock market can be risky! 

We could also think about owning higher percentages of these stocks and securities to compete with the big companies that own so much of everything. Or consider ways to invest ethically - we will have a future episode on ethical and ESG investing!

Remember, knowledge is power, especially when it comes to the stock market. The more you understand how it works, the better equipped you'll be to make informed investing decisions.

Stock Market Vocabulary Definitions

To understand the stock market better, it's important to get familiar with some key terms:

• Primary Market: Where new stocks and bonds are created and sold to investors for the first time, directly from the issuer.
• Secondary Market: The actual Stock Market, where investors trade those new securities/stocks they bought from the IPO and then sell them through a stock exchange.
• Stock Market: A marketplace where you can buy and sell pieces of publicly-traded companies.
• Stock Exchanges: Platforms that facilitate the buying and selling of stocks, such as NYSE and NASDAQ.
• IPO (Initial Public Offering): The process through which a private company goes public by selling its stocks to the general public for the first time.
• Index/Indices: A group of securities with a set of requirements that helps measure the performance of a certain segment of the stock market.
• Securities: Stocks, bonds, mutual funds, ETFs, etc.
• Market Cap Weighted: The total market value of a company, determined by the stock price multiplied by the number of shares available. S&P 500 is “market cap weighted.”
• Price Weighted: The method where the stock with the highest price has the biggest influence. Dow Jones uses this method.
• Trading: Buying and/or selling securities. Often considered "short-term".
• Stock vs Shares: Buying a stock is buying a piece of a company, and shares are a unit of measurement (i.e. I bought 10 shares of ABC stock).