by Jim J Jones

Created on: May 25, 2009

For as long as stocks have existed, a mythology has existed around them. The stock exchange is like a casino, except that it has no security cameras, no bouncers, and no rules. Fortunes are made, and fortunes are lost. Secretive, high-paid men in black suits shuffle around more money than we could ever conceive of, and the slightest misstep on their part could, like a stone thrown in a pond, ripple outwards, affecting everyone and everything. However, with the advent of OTC ("over-the-counter" computerized trading), the stock market is no longer the exclusive domain of the Wall Street broker. It is now available to everyone, a gigantic slot machine that will reward a small few with millions, impoverish many, and leave the vast majority largely unaffected.

The first step to understanding the stock market is to understand what a "stock" is. Stock is to a company what a time-share is to a house: it is simply partial ownership. When a company holds a public offering and sells 50% of itself, it is analogous to a homeowner selling 6 months of timeshares on his house. The homeowner gets to decide how long each individual time-share will be (a day, a week, a month), much as the the company gets to decide how many pieces to subdivide it's 50% into. The buyer then decides how many of these divisions he would like to buy.

At the simplest level, the stock market is just a market where owners of time-shares go to try to sell them to prospective buyers. As in any other market setting, the price is determined by the supply, the demand, and the specifics of the product (the house). There is, of course, a whole additional layer of complexity added when you begin to delve into the complicated trades such as futures, shorts, limits, and other similar financial tools. For the time being, however, stick with the simple ones: Buy, and Sell. Set the price, the number of shares, and the company, and presto! you own a small piece of a company.

If you're considering actually investing money in the stock markets, you have two options:

The first is to set up an account on a website like eTrade or Charles Schwab, where you will choose which stocks to buy and sell. If you have confidence in yourself and your knowledge of the market, you can try this. Don't put your life's savings in it, though, as you probably don't have the experience necessary to manage large quantities of money in a safe way.

The second option, and this is what to do with your savings, is to put your money in a mutual fund managed by a big financial business, or alternatively you can put your money in an "index fund". Index funds are large pools of money that are invested in the businesses that compose an index (such as the Dow Jones, or S&P). Both mutual funds and index funds tend to post slow but steady returns, and they're a good way to ensure that you'll be able to retire with dignity.

There you go! You understand what stock consists of, how it's traded, how it's value is determined, and (last, but certainly not least) how you yourself can lay hands on some yourself! But as with everything else, be smart, use caution, and don't get in over your head.

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