What is a stock, and what is the stock market?
A stock, or share, is a small piece of ownership in a company. Own one share of a company with a billion shares and you own one billionth of it: a claim on its profits, its assets, and usually a vote on how it is run.
Why companies sell shares
Companies need money to grow. They can borrow it (debt) or sell part of the business (equity). Equity doesn’t need repaying, but it means sharing future profits with new owners. The trade-off between the two is a theme that runs through all of finance.
Primary and secondary markets
When a company first sells shares to the public, that’s the primary market, usually an IPO (more on that below). After that, investors trade those shares with each other on the secondary market. That’s what people mean by “the stock market”. When you buy a share of Apple, your money goes to another investor, not to Apple.
Trading happens on exchanges such as the London Stock Exchange, the NYSE and Nasdaq. The exchange matches buyers and sellers and publishes prices. Brokers give individuals access to it.
Why the price moves
In the short run, price is set by supply and demand: more eager buyers than sellers and it rises. In the long run, it follows what the business is expected to earn. A share is worth the cash it will return to owners in the future, discounted back to today. Everything else (news, rates, sentiment) moves price by changing those expectations or the rate used to discount them.
IPOs: going public
In an initial public offering, a company works with investment banks (the underwriters) to sell new shares. The banks gauge demand from large investors in a process called book-building, set a price, and allocate shares. Trading then begins on an exchange.
- The “pop”. IPOs are often priced slightly below where they will trade, so day one jumps are common. Money left on the table for the company is a win for the first buyers.
- Lock-ups. Insiders usually can’t sell for a period (often 90 to 180 days). When it ends, extra supply can weigh on the price.
- Alternatives. Direct listings skip the new share issue, and SPACs merge a private company into an already-listed shell.
Historically, the average IPO has underperformed the market over the following years. Hype, limited history and insider selling all play a part.
Key takeaway
A share is part-ownership of a real business. The market is the place those claims change hands, and over time, prices follow profits.
Educational content only, not financial advice. Investing involves risk and you can lose money.