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The stock market, explained

What a share of stock is, why prices jump or drop on the news, and what the S&P 500, Dow and Nasdaq actually measure.

Worksheet: Stocks, bonds and diversificationIn the news (3)

A stock is a tiny piece of ownership in a company. If a company is split into a billion shares and you own one, you own one-billionth of it. Companies sell shares to raise money, and after that, investors buy and sell those shares with each other on the stock market.

A stock's price moves for one main reason: investors change their minds about how much money the company will make in the future. Good news about future profits pushes the price up. Worries push it down. That's why a stock can fall even after a company reports a great quarter: if its forecast for next quarter (its guidance) disappoints, investors care more about what's coming than what already happened.

Four times a year, public companies report earnings. Watch for revenue (all the money that came in) and earnings per share (profit divided by the number of shares), and whether each beat or missed what Wall Street expected.

The market indexes are scoreboards for groups of stocks:

  • S&P 500: about 500 of the largest U.S. companies. Most people mean this when they say "the market."
  • Dow Jones Industrial Average: 30 big, well-known companies.
  • Nasdaq Composite: thousands of stocks, heavy on tech.

A bull market is a long climb in prices, and a bear market is a fall of 20% or more from a recent high. Day to day, prices bounce around on headlines. Over decades, the U.S. market has grown, but with big drops along the way, so money you'll need soon doesn't belong in stocks.

For teachers: covers NC EPF EPF.FP.1.1 Investing strategies and building wealth; EPF.E.1.4 Incentives and profits in a market system; EPF.E.2.4 Economic institutions and their roles.

In the news

Real stories from recent issues, each with class slides and a worksheet.

Lesson worksheets

Words to know

Stock
A small slice of ownership in a company. One unit is called a share.
S&P 500
A stock market index that tracks about 500 of the biggest U.S. companies. It's the most common way to measure how the market did.
Dow Jones Industrial Average
A stock market index that tracks 30 large U.S. companies.
Nasdaq Composite
A stock market index of the thousands of companies listed on the Nasdaq exchange. It leans heavily toward tech companies.
Earnings per share
A company's profit divided by its number of shares. Wall Street compares it with what analysts expected.
Revenue
All the money a company brings in from sales, before any costs are taken out.
Guidance
A company's forecast of its future sales or profits. Stocks often move more on guidance than on past results.
Bull market
A long stretch of rising stock prices, usually counted from a 20% climb off a low.
Bear market
A stretch when stock prices fall 20% or more from a recent high.
Dividend
A share of a company's profits paid out to the people who own its stock.
Stock buyback
When a company uses its cash to buy back its own shares, leaving fewer shares for everyone else.
Bond
A loan you make to a government or company. It pays you interest and returns your money on a set date.
Diversification
Spreading your money across many different investments so one bad one can't sink you.
Index fund
A fund that buys every stock in an index, like the S&P 500, so you own a small piece of all of those companies. Fees are usually low.

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More topics

Inflation · Interest rates and the Fed · Investing · Budgeting · Paychecks and taxes · Credit cards and credit scores · Loans and debt · Banking and saving · Insurance · Scams and identity theft · The economy: jobs, GDP and recessions · Supply and demand · Tariffs and trade

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