Stock Market Basics

1. What Is a Stock?

A stock is a fractional ownership stake in a company. When a company sells shares to the public — through an IPO (Initial Public Offering) — it's dividing itself into millions of tiny pieces and selling them to investors. If you own 100 shares of Apple and Apple has 15 billion shares outstanding, you own roughly 0.0000007% of the company.

That ownership entitles you to a proportional share of the company's earnings (paid as dividends if the company chooses to distribute them) and a vote on major corporate decisions. More importantly for most investors, it entitles you to participate in the appreciation of the company's value over time.

2. How the Stock Market Works

The stock market is a network of exchanges — primarily the NYSE (New York Stock Exchange) and Nasdaq — where buyers and sellers trade shares of publicly listed companies. The "market" is really just a continuous auction: at any moment, there are people willing to buy a stock at a certain price (the bid) and people willing to sell at a certain price (the ask). When a bid and ask match, a trade happens.

U.S. markets are open Monday through Friday, 9:30 AM to 4:00 PM Eastern Time. Pre-market trading (4:00–9:30 AM) and after-hours trading (4:00–8:00 PM) also exist, but with lower liquidity and wider spreads. Major earnings reports are often released before the open or after the close specifically to allow investors to process the news before the full market opens.

3. Market Cap: How Companies Are Sized

Market capitalization (market cap) is the total value of all a company's outstanding shares. It's calculated simply: share price × shares outstanding. A company trading at $100 per share with 1 billion shares outstanding has a market cap of $100 billion.

4. How Stock Prices Are Set

In the short run, stock prices are set by supply and demand — how many people want to buy vs. sell at any given moment. Sentiment, news, earnings surprises, and macro events all move prices in the short term. In the long run, stock prices converge toward the present value of a company's future earnings. That's why earnings growth is the single most important driver of long-term stock performance.

The "discount rate" — essentially the risk-free interest rate plus a risk premium — determines how much those future earnings are worth today. When interest rates rise, the discount rate rises, and the present value of future earnings falls. This is why rising rates are generally bad for stocks, especially high-growth companies whose earnings are weighted far into the future.

5. The Key Valuation Metrics

6. Stock Market Indexes

A stock market index is a basket of stocks that represents a segment of the market. Indexes are used as benchmarks — if your portfolio returned 12% last year but the S&P 500 returned 20%, you underperformed the market despite making money.

7. Bull Markets vs. Bear Markets

A bull market is a sustained period of rising stock prices — conventionally defined as a 20% rise from a recent low. A bear market is a sustained decline of 20% or more from a recent high. The average bull market lasts about 5 years and produces gains of roughly 180%. The average bear market lasts about 10 months and produces losses of about 35%.

The most important thing to know about bear markets: they end. Every single bear market in U.S. history has been followed by a new bull market that eventually surpassed the previous high. Long-term investors who stay invested through bear markets consistently outperform those who try to time the market.

8. Types of Stocks

9. How to Start Investing

The best time to start investing was yesterday. The second best time is today. Here's the practical framework for getting started:

Step 1: Open a brokerage account. Fidelity, Schwab, and Vanguard are the three best options for long-term investors — zero commissions, excellent research tools, and no account minimums. Avoid platforms that gamify trading (frequent push notifications, confetti animations) — they're designed to make you trade more, which is almost always bad for returns.

Step 2: Start with index funds. Before picking individual stocks, build a core position in a low-cost S&P 500 index fund (VOO, IVV, or FXAIX). The evidence is overwhelming: over 10-year periods, roughly 85–90% of actively managed funds underperform the S&P 500 after fees. Index funds guarantee you the market return, which beats most professionals.

Step 3: Invest consistently. Dollar-cost averaging — investing a fixed amount on a regular schedule regardless of market conditions — removes the temptation to time the market and ensures you buy more shares when prices are low. It's one of the simplest and most effective long-term strategies.

Step 4: Maximize tax-advantaged accounts. Contribute to your 401(k) at least up to the employer match (that's a 50–100% instant return on your money), then max out a Roth IRA ($7,000/year in 2026). The tax savings compound dramatically over time.

10. Stock Market Glossary