The stock market is a network of exchanges where ownership stakes in public companies (shares) are bought and sold. Over the long run, US stocks have returned about 7% annually after inflation since 1928 — but that average hides years like 1931 (-43%) and 1954 (+53%). The market is a voting machine in the short run and a weighing machine in the long run.
What a share actually is
A share is a legal claim to a fraction of a company's future profits. If you own 1 share of Apple out of roughly 15 billion shares outstanding, you own about one 15-billionth of the company.
That stake entitles you to (a) dividends if the company pays them, (b) the right to vote in shareholder meetings, and (c) a slice of the sale price if the company is acquired. Most individual shareholders never vote.
Exchanges
Exchanges are matching engines. The NYSE and Nasdaq are the two US biggies, handling roughly $500 billion in trades per day combined. When you hit "buy" in an app, your order flows to an exchange, which pairs you with a seller at the current price.
Modern trading is almost entirely electronic. The floor traders you see on TV are mostly theater — 99% of volume is computer-to-computer.
Bull vs bear
A bull market is when prices rise 20% or more from a recent low. A bear market is a 20% drop from a recent high. Both are arbitrary cutoffs, but they signal mood.
Average bull market since WWII: 4.4 years, +150% gain. Average bear: 1.3 years, -33%. The math strongly favors staying invested — bears are shorter and rarer.
Indexes
An index is a basket of stocks that represents a slice of the market:
- S&P 500 — 500 large US companies, weighted by market cap.
- Dow Jones — 30 big US companies, weighted by share price (quirky).
- Nasdaq 100 — 100 biggest Nasdaq-listed companies, tech-heavy.
- Russell 2000 — 2,000 smaller US companies.
When a news report says "the market went up," they usually mean the S&P 500.
Why stocks go up over time
Two reasons:
- Companies make more money over time — population grows, productivity grows, prices rise. Profits rise roughly in line.
- Inflation — a stock is a claim on future cash. If cash inflates, the claim inflates too.
Stocks also benefit from compounding. $1,000 invested in the S&P 500 in 1980 with dividends reinvested would be worth about $140,000 today — a 140x return over 46 years.
Why stocks go down
Same reasons, reversed. Recessions cut profits. Rising interest rates make future cash less valuable. Panic compounds both — when stocks drop 10%, retail investors sell, which drops them further.
The 2008 financial crisis cut the S&P 500 by 57% from peak to trough. It took 5.5 years to recover. Investors who sold at the bottom locked in losses. Those who held made it all back and then some.
What individual stocks are worth
In theory: the sum of all future cash flows discounted to today. In practice: whatever someone will pay. The gap between "theory" and "practice" is where fortunes are made and lost.
The boring truth
Most professional fund managers underperform the S&P 500 over 20-year periods. About 90% of active large-cap funds lose to the index net of fees. Buying an index fund and ignoring the news beats nearly everyone.
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