One of the reasons why people like going to the mall or to a city's shopping district is that they can purchase a variety of products in one area. Similar to a mall, people can buy and sell a unique product in a stock market. That product is stock, which is shares of ownership in a company. Potential investors get to choose from many companies that sell a variety of goods, from clothing to medicine and from sports equipment to toys. When people buy and sell stock, it's known as "trading."

I own stock, now what does that mean?
When a person buys a company's stock, that person becomes a shareholder in that company. (A "stockholder" is another name for a shareholder.) A shareholder is also considered an investor in the company. When that company makes money, which can also be called earned income or profit, the value of the company's stock often increases. That's because more people may become interested in investing in the company. Sometimes, shareholders receive a dividend, which is a portion of the company's earned income in the form of a cash payment.

Some people try to make money by buying and selling stocks. Stock prices can move up and down. Shareholders may make money or lose money by selling stocks that they own, depending on whether the price has gone up or down since they bought their shares. A company's stock price may be affected by market or economic conditions. For example, let's say that ABD Enterprises is a software company that has introduced a new video game into the market. If that game is a hit, sales of the video game could boost the company's earnings. Because of the potential for ABD Enterprises to grow, its stock may be viewed as an attractive investment and its stock price may go up as more people buy shares. On the other hand, let's say the video game that it introduced is a flop. It could be a good game, but ABD introduced it at a time when people started spending less on leisure products. Another possibility is that ABD's game is one of many new games entering the market at the same time. The result is that no one is buying ABD's game, and it's reported that ABD is losing money because of this new product. The stock price for ABD Enterprises may go down if a number of shareholders decide to sell their shares.

The hundreds or thousands of people who invest in a company's stock also have an effect on the stock's price. As more people want to buy shares, the stock's price usually goes up because more people want to own it. On the other hand, if more people want to sell their shares and there is less demand for them, then the price of the stock may go down.

Mutual funds buy stock, too
Just like an individual, a mutual fund can also buy or sell shares of a company's stock. A mutual fund is operated by an investment company and invests in a group of stocks and/or bonds.¹ A mutual fund is professionally managed by one or more portfolio managers. The people who invest in a mutual fund are also known as shareholders because a unit of ownership in a mutual fund is called a "share." Since a mutual fund may contain the stocks of many companies in its portfolio, shareholders are often able to own a greater and more diverse number of stocks than if they invested directly in the stock market.

When a mutual fund purchases a company's stock, changes in the company's stock price can affect the fund's share price. Let's go back to ABD Enterprises. If the price of ABD's stock goes up, it may help the fund's share price to increase in value. However, a decline in the price of ABD stock may have a negative impact on the fund's share price. The change in the value of a fund's share price depends on a number of factors, including the performance of other stocks in the fund's portfolio and how much of the fund's assets are invested in that stock. If a mutual fund receives a dividend from one of the stocks in its portfolio, then it may pass along a portion of that dividend to its shareholders. If the fund sells the stock, it usually passes along any (net) price increases as capital gains.

Two Measures of Market Performance
Stock market averages are often quoted in newspapers and on TV because they provide clues about overall movements in stock prices and whether most investors are trying to sell or buy shares. The most often-quoted market average is the Dow Jones Industrial Average, which was started by Charles Dow more than 100 years ago. He published it in a newspaper he owned with Edward Jones. The prices of a specially selected group of 30 industrial stocks (some of the largest companies in the United States) are averaged each day to determine the Dow Jones Industrial Average.

TheStandard & Poor's 500 Index (S&P 500) tracks not just 30, but 500 different stocks! That's why many people think this index gives a clearer picture of the stock market than other stock market averages or indices. In addition, a number of mutual funds compare fund performance against the S&P 500 because this index includes companies from a number of industries like utilities, health care and financial services. Since the S&P 500 includes so many companies and industries, it's known as a broad-based index. Although a mutual fund may compare its performance to the S&P 500 or another broad-based index, this does not mean the fund's portfolio has the same stocks that are tracked in the index.

¹ Our articles "What's A Stock?" and "What's A Bond?" provide more information on these two securities.