The stock market—and its lingo—can seem intimidating to the first-time investor. But it can be an important way to build wealth, particularly over time.
A company raises money by selling shares, or stocks, to the public. People buy the stock hoping the business will prosper in the future. They also receive any dividends the business pays out. The price of a share fluctuates, based on supply and demand. If lots of investors want to buy a stock, the price goes up. If fewer investors are willing to sell, the price goes down. Prices are constantly negotiated over the course of a trading session by buyers and sellers. Two numbers that are important in this process are the ask and bid prices. The ask is the lowest price a seller is willing to accept, while the bid is the highest price a buyer is willing to pay.
Large companies, such as Coca-Cola and Johnson & Johnson, tend to have lower volatility, while small companies are more volatile. Some stocks are part of what’s called the defensive sector, which includes utilities and consumer staples (think Hershey). These companies have historically had fewer price swings and provide stability to your portfolio—and, not incidentally, calm for your heart rate.
Investing in great businesses at reasonable prices and holding those investments for as long as possible is a tried-and-true strategy that has delivered exceptional returns over the decades. But, as you get older, the odds of being able to stomach dramatic stock market fluctuations decline, and the potential for a loss of your entire investment makes it a less desirable place to keep much of your money.