Stocks explained without the jargon

A share of stock is a slice of ownership in a company. If a company has issued one billion shares and you own one share, you own one-billionth of the company. That is it. The fancier word for this is 'equity', which just means ownership.

How stocks make you money

There are exactly two ways:

1. Price appreciation: the share is worth more later than what you paid for it. If you buy at $100 and sell at $130, you made $30 per share.
2. Dividends: some companies send a small cash payment to shareholders every quarter. Not every company pays a dividend. Younger growth companies usually reinvest profits instead.

How stocks lose money

Stocks go down when the market thinks the company will earn less in the future, or when the broader economy looks weaker, or sometimes for no particular reason at all. In any single year, the U.S. stock market has historically lost money roughly one year in four.

Over long periods, twenty or thirty years, diversified stock portfolios have historically gone up. But over short periods, they bounce around a lot.

What 'the market' means

When you hear 'the market was up today', that usually refers to a stock index, a basket of many companies tracked together. The most common ones in the U.S. are the S&P 500 (500 of the largest U.S. companies), the Dow Jones (30 large companies), and the Nasdaq Composite (heavy in technology).

What this lesson is NOT

This lesson explains what owning a share is and how it gains or loses value. It does not tell you which stocks to buy or when, and it is not a method for timing the market.