You've probably heard about the stock market on the news before. But do you know how it works? The basic principles which drive the stock market are not that difficult to understand.
When people buy and sell on the stock market, they are buying and selling shares of a company. What are shares? Shares are a way for business owners to divide the total value of their business and sell it to investors.
The dividend of a share of stock is the percentage of the profit which is paid yearly to the shareholder. For example, if the company in the example above made $50 in profits this year, and you owned 1/10th of the company, you would make $5.
When people buy shares of a company, it is called investing. Investing is another way to save money. It works similarly to a savings account, but instead of earning interest each year, a person who invests is earning a dividend on their investment. When the shareholder no longer wants to own shares of a company, he or she can sell it.
Investing is riskier than a savings account, because while it is safe to assume a bank will always be around to pay you interest and keep your money, there is no guarantee that a business you invest in will not go bankrupt. You could lose all of the money you paid for your shares. However, buying shares of a successful business when it is still small and the shares are cheap could result in a much larger sum of money in the end than a savings account.
Investing is another way which people use to help increase their savings and plan for the future.