What is the stock market? | A teen guide

Think back to the last time you scrolled through the news on your phone. Chances are you saw something about the stock market — its daily performance, a stock market report, or a newly listed stock on an exchange. But what is the stock market and how does its performance affect you? Even if you don't own stock yet as a teen, it's important to understand how it works. You might decide to even invest in stocks of your own. 🙌

The basics of the stock market

A stock market is where investors can buy or sell shares in a public company, which rise or fall in value over a trading day during stock market hours. Owning stock in an organization allows investors to financially benefit from changes in share price. They realize gains when they sell their shares. When you hear people refer to the stock market, they may be discussing a specific stock market exchange, like the New York Stock Exchange (NYSE) or Nasdaq. Both exchanges list stocks in thousands of public companies, including Meta and Netflix.  

What exactly are stocks?

Companies often need money for different purposes, such as regular operations, expansion, or research and development. One way organizations raise money is by selling shares of stock to interested investors. 

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Before a company can list stock for sale, it must get approval from regulatory authorities. If approved, it can sell stock through an initial public offering (IPO). Once the IPO occurs on the primary market, the stock can start trading on the largest stock exchanges, like the NYSE. The company receives funding from the shares sold, while the investor may benefit from future share price gains or dividends.   

You can track a stock's performance on the exchange where it's listed. While the U.S. contains several major exchanges, other countries have their own exchanges on which some companies list their shares.

What is ownership?

When an investor buys a share of stock, they become a partial owner of the company. However, that doesn't mean the investor can start directing the company's business activities. Instead, their investment generates potential financial returns. The more shares you own in a company, the greater your percentage of ownership. For instance, owning one share of a company that issues 5 million shares means you own 0.00000003% of the company. That's pretty tiny! If you owned 2.5 million shares of that same company, your ownership would jump to 50%. 

After buying a stock, you can hold on to it as long as you like. Once you sell it, you'll receive its current value on the public markets, less trading fees. 

The players in the stock market

Brokers, traders, and investors are the major players in the stock market, and they have different functions.

A broker can be a person or an organization, and they are sellers of stocks. Brokerage services act as the go-between for investors and stock exchanges. The investor will seek a broker's help to purchase a stock. Once they pay money to buy, the broker will submit the order to the exchange and handle the transaction. Stock exchanges can only accept orders from member brokers, not the general public. 

A trader regularly buys and sells individual stocks, exchange-traded funds (ETFs), mutual funds, and other securities. Their goal is to profit by buying shares at a low price and then selling them at a higher price. Some traders work for themselves, while others manage investment portfolios or funds for other investors. Generally, traders hold onto their shares for short periods, such as a few days or weeks, before selling them. 

An investor is any person or entity who buys various types of stocks or securities to earn a return. Investors usually have specific goals they seek to meet through their investing activities, like saving for retirement or building wealth.💲An investor's objectives and risk tolerance can impact the type of securities they buy and how much they invest. For example, someone with a higher risk tolerance may be more accepting of securities with a history of volatility.

How stock prices are determined

When a stock first starts trading in an IPO, its price is set by investment bankers who perform a valuation of the company. The stock price may rise or fall depending on various factors. Stocks in high demand may increase in value quickly, while those with less demand may not see much change in their stock market prices. 

High demand for a stock occurs when investors believe a company has significant earnings potential. Often, share prices can sharply increase or decrease following the company's earnings release, which occurs at the end of a quarter or year. Other factors impacting stock prices include the general economy, industry conditions, news reports, and trends.

Let’s look at Netflix — the ubiquitous video streaming service. 📺 It first went public in 2002, with an IPO share price of $15. For nearly a decade, its price fluctuated between a low of $2.30 and $30. In 2015, when streaming took off, Netflix shares quadrupled. Today, it sells for around $500 per share. Some early investors who held onto their Netflix shares became millionaires. 

What caused the Netflix share price explosion? 🧨 A combination of factors. People realized they could save money on cable TV costs by subscribing to Netflix. Plus, Netflix started producing lots of unique content unavailable anywhere else. Today, nearly 250 million people pay for Netflix service! 

Different investment strategies

As you start to consider investing, it's essential to understand some of the various strategies investors use to earn a return. There are a few strategies beginner investors can use to start their investing journey. 

One of the most straightforward strategies is simply buying stock all at once and holding it for the long term. While its value may rise and fall over the years, you hope that your return in the future will outweigh the initial price you purchased it for. So, let’s say you have $5,000 and really, really like Stanley cups. 🥤 You could buy $5,000 worth of Stanley stock, then hold onto it for years (or decades) until you decide to sell.

Dollar-cost averaging is another simple trading strategy that doesn't require complicated analysis or knowledge. In dollar-cost averaging, you purchase the same amount of stock at different times. For instance, you might buy $400 worth of shares in the same company monthly. Over time, the differences in share prices average out, reducing portfolio volatility. 

Both strategies can result in long-term gains. Under the buy and hold strategy, if share prices in Stanley increased from $50 per share to $80 per share over ten years, you’d realize a 60% gain, or 6% annually. The dollar-cost averaging strategy allows you to spread out your investment, so you’d benefit from fluctuations in share price that even out over the long term.

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While the stock market can seem complex, you don't have to be an investment professional to get involved. Even if you're still in high school, you can start investing early through Greenlight's investing app. You can buy fractional shares in the companies that excite you, potentially earning a return over time. Plus, there are no hidden fees for the service, and your parents retain approval for every trade you make. Get started building your financial future with Greenlight today!