Stocks demystified

Do you know what a “stock” is? Don’t be ashamed if you don’t. When Andini Makosinski asked young people on the street about stocks for Million Stories’ “Your World on Money” series, many admitted to being mostly clueless. 

As Investopedia dryly defines, “A stock, also known as equity, is a security that represents the ownership of a fraction of the issuing corporation. Units of stock are called ‘shares’ [that entitle] the owner to a proportion of the corporation’s assets and profits equal to how much stock they own.”

To translate, buying shares of a stock grants you fractional ownership of a business. You literally become a part owner — even able to vote on internal matters of the company. As that business evolves, perhaps growing more profitable or — in more unfortunate circumstances — going bankrupt, the value of that stock will increase or decrease depending upon what others are willing to pay for it. You can turn your ownership into cash by selling the stock.

Stocks are a wonderful way for citizens of a country to reap rewards from the wealth generated by that country’s companies. In theory, it’s a true democratization of riches. Anyone can own a piece of Apple, Starbucks, Tesla, or one of the thousands of other publicly traded companies. 

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Easier access to stock markets

As exemplified by the “meme stock” phenomenon starting in 2020, where everyday individual “retail” investors banded together to buy the stocks of companies like GameStop, AMC, and Bed, Bath, and Beyond, small-time investors have never had more power and access in the major stock markets. (Note: Buying so-called “meme stocks” in the hope of getting rich quickly is not the wisest use of your money. More on that later.)

This was fueled by a sea change in 2019 when essentially all major stock brokerages went commission-free. While people used to pay fees for using online trading platforms run by brokerages like TDAmeritrade or Fidelity (often something like $7 to buy or sell a stock), now they could do it for almost no cost at all! (Brokerages technically do make money off your trades, roughly amounting to tiny fractions of a penny on the dollar.)

What’s more, brokerages have also made it easier access to trade stocks by releasing smartphone-based trading platforms. Anyone with internet access can buy or sell a stock in seconds — again, basically for free.

Before the rise of the internet, you’d have to call a broker via the telephone to request a stock purchase or sale. The broker would then send your order to an actual trader on the floor of a stock exchange, who would then make the purchase for you directly. Needless to say, the process was costly and sluggish.

Now that investing in the stock market is fast and easy, it’s catching on among younger generations. Millennials, for example, triggered more trades than any other generation in the fourth quarter of 2022, according to a recent report from Apex Fintech Solutions. Generation Z is also getting into the mix. Roughly half of Gen Zers aged 18 to 25 said they owned at least one investment product in July 2022, according to a Morning Consult poll released last summer.

But while Generation Z and Millennial stock ownership remains high compared to when prior generations were the same age, it is down since 2021. The likely causes include high inflation, the stock market decline, and waning interest in “meme stocks.” 

Stocks as part of a diversified portfolio

Falling stock prices are a short-term headache, but they do provide an opportunity for young investors with a long-term mindset, as they can buy into stocks for cheaper. Though there’s no guarantee that stocks will increase in value, over more than a hundred years of history, stocks have generally done just that. 

The key to making sure you benefit from this bounty is to buy a slew of company stocks, collectively doing business in all corners of the economy. That way if one company goes under and its stock price goes to zero, others might still be doing great. This is known as diversification.

Luckily, it’s never been easier for novice investors to diversify. Exchange-traded funds, or ETFs for short, hold dozens or even thousands of stocks so you don’t have to individually buy them. Moreover, they can be readily purchased in the same manner as any single stock.

For example, in the last two decades, anyone invested in an ETF tracking the S&P 500 index, representing the value of 500 large American companies, would have seen their investment quadruple.

Apps like Acorns allow anyone to buy into diversified ETFs in tiny increments: $10 every now and then adds up over time. With enough patience, it can even accrue to a car purchase or a down payment on a home.

But without patience, you can also lose money very quickly in the stock markets. Just as new trading platforms have made it easier than ever to buy and sell stocks, they’ve also made it easier to place risky bets on the price movements of various assets. So beware of the distinction between investing in reputable stocks and day trading.

Ultimately, as Makosinski learned from speaking to stock market experts, investing in stocks really isn’t all that intimidating.

“Now I realize that anybody can do it,” she said. “While it will always be a risky game to play, investing can ultimately make a huge difference in one’s finances, and you can start with any amount.”

In fact, over one-third of individual investors had annual incomes less than $50,000 in 2022, according to MarketWatch. For too many people, investing in stocks has historically seemed complex and out-of-reach, solely under the control of “fat cats” living large on Wall Street. But the reality is that buying into the stock market, where your money has the potential to significantly grow over time, has never been more accessible for the average person living on Main Street.