How do stocks/the stock market work?

[Noel]

I need a little help understanding the stock market for a school project.

[LiberryAnn]

Some one has started or owns a company outright. As a way to do bigger and better things or just to share their business with others, they take the company public. As Facebook found out recently, if you get a certain number of investors without going public, you can be forced to go public.

Once you are going to go public and sell your stock on an exchange, unlike a private company, you have to make your information open to everyone including your competitors. You must send in reports on a quarterly and an annual basis. Unlike your Annual Report that can be a PR piece for your investors, and often is, your reports to the Security and Exchange Commission must tell the truth and the whole truth. As long as you are telling the truth there, you are pretty safe.

Whatever percentage of the company is being sold, is divided into a number of shares. Some of these shares go to the principals of the company. Some shares may go to someone's relatives and kids. In some cases like Col. Sanders of Fried Chicken fame, he refused the shares and his secretary took them. She died a millionaire; he did not.

Workers and officers are paid in part in shares. This can be a good thing or a bad thing. The idea is to have people motivated by having skin in the game, but to a large extent, luck pays a big part in it too.

You go public at a certain price. The expectation is that when the stock opens lots of people will want in and the stock will go higher. Some people become rich when that happens. Other people may only become wealthy later if the stock does well. Keep in mind that it is not guaranteed that the stock will do well.

The stock trades all hours the exchange is open and because everything is global now, there will be after hours trades around the world. Stocks can be trading at one price in New York and then after the exchange there closes, something happens that makes the price of the stock change a lot.

You can use Yahoo Finance and look up charts to see how they go up and down. The idea is to buy low and sell high, but that is harder to do than it sounds. The price of everything is always changing and people have different ideas about when to buy. Some buy every month of so, a certain amount so that as the price goes up they are buying less of the stock, and when the price goes down they are buying more of the stock. This is called dollar price averaging. Other people do not believe in doing so that way.

I hope this tells you what you want to know. There is a lot of other stuff to talk about, but I have to stop somewhere. You might look up options and hedging. One way of learning more about the market is to paper trade. That is, pretend you are buying a stock and write down the price of a certain day. On the same day in the following month, see if you have made or lost money.