Stocks 101

Questions and Answers

Q:  What is stock?
A:  A share of stock is a fractional share of the ownership rights in a
company.  When someone says “I own GM,” they're not kidding: they own a
(small or large) chunk of the ownership rights.

Q:  What is the stock market?
A:   The stock market is a market where the participants buy and sell
shares of stock.  There are buyers (individuals, mutual funds,
pensions), sellers (same list), and intermediaries (brokers, dealers,
market makers).

Q:  What does “the stock market went up today” mean?
A:  It means that some (or all) of the major market indices (that's
plural of index) rose.

Q:  What's a market index?
A:  An index is a way of collecting information about a group of stocks
into a single number.  For a market index, the group is the market
itself.  The two main indices in the US are the Dow Jones Industrial
Average (tm), which is an index of thirty large stocks, and the
Standard and Poors 500 (tm) which is an index of five hundred of the
largest stocks.

Q: What are the largest stock markets?
A:  In the US, the primary stock markets are the New York Stock
Exchange and  NASDAQ, a computerized trading network. Abroad, there are
large stock markets in London, Paris, Frankfurt, Toronto, Tokyo,
Taipei, and Hong Kong.

Q: Who sets the price of a stock?
A:  No one! It's like the price of most traded goods: it depends on
supply and demand. More demand or less supply, higher prices; Less
demand or more supply, lower prices.

Q: OK, so what makes demand for stock increase?
A:  Many factors affect demand, including interest rates, corporate
profits, and (most importantly) investors’ expectations of the future.

Q: What is a “PE ratio”?
A:  The P/E is Price/Earnings.  Here, is the per-share price of a stock
divided by the per-share earnings.  It is one of many measures
investors use to value a stock.

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