Clever Girl Finance

CHAPTER 2How the Stock Market Works

Knowing how things work changes the game.

#CLEVERGIRLSKNOW

In order to really understand investing and how it works, a great place to start is with the stock market itself. The stock market is probably the first thing that comes to mind when you think about investing. And you can't talk about investing in stocks without mentioning the stock market itself.

You've probably heard references in the media or in conversation to things like stock exchanges, indices, bull and bear markets, and more. Maybe these terms sound unfamiliar to you, or you have a vague understanding of what the stock market is. Either way, that's fine. In this chapter, I'll be breaking down just what the stock market is, how it works, and what you need to know about it.

WHAT IS THE STOCK MARKET?

The stock market is basically where buyers and sellers trade assets like stocks (also known as shares or equities) and bonds.

A stock represents an ownership share in a company. They are sold by corporations who want to raise capital to fund the growth of their business. Stocks rise and fall in value based on what buyers are willing to pay for them and what sellers are willing to take for them. People make money from investing in stocks either from buying low and selling high, or from compounding growth over time based on valuation and dividends earned.

A bond on the other hand is basically a loan that you, the investor or bond holder, can make to a borrower (e.g. the government ...