What is a Stock?
When a company wants to get more money to help it grow, it typically has 2 options. It can go to private investors or investment firms who give them money in exchange for ownership of a piece of the company. The other option is to put a piece of the company up for sale to the public. To do this, they break up the piece they want to sell into many tiny slices, which are called shares.
You can think of it like selling an apple pie. Let’s say you baked an apple pie and you want to keep some of it for yourself, but you’d also like to sell some of it to make some money for your pie-baking business. So you keep half for yourself, and you divide the other half into several slices that you offer to friends and family to purchase (the “shares”).
Note that you will often hear people use the terms “share” and “stock” interchangeably, for example “I bought some stocks today”. We often use these terms interchangeably too!
The price of a stock is determined based on supply and demand. If a company is poised to grow and do well, lots of people might want to buy it so the value goes up. If people stop believing in the company, people might want to sell their shares and prices will drop since demand has gone down. Supply, or the number of shares available to buy, also impacts the price. If there aren’t very many shares to buy and it's in high demand, the price of the share will go up. But if there’s lots of shares available, the price might be lower.
Going back to our pie example, if you’re known to be a phenomenal baker, your friends and family would be willing to pay more for each slice than if you were a mediocre baker. Similarly, if you only cut the half you planned to sell into 3 pieces, people would be willing to pay more for each slice than if you split it into 10 pieces.
When a company sells their shares for the first time, it’s called an Initial Public Offering (IPO), because it’s the first time the public gets the opportunity to buy shares of the company. But once all of the shares are sold, the original buyers need a place to resell their shares to other people. That’s called the Stock Market!
