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Investing

Stock market 101

What the stock market actually is, in plain terms, and the difference between public and private companies.

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What is the stock market, in plain terms? It's a marketplace where investors buy and sell small ownership pieces of companies, called shares. When you own a share of a company, you own a tiny slice of that business, and its value rises and falls with how the market judges that company's prospects.

Private companies

Owned by founders, private investors, or employees. Examples include Chick-fil-A, Anthropic, and OpenAI. You can't buy their shares on the open market — ownership is negotiated directly and isn't available to the general public.

Public companies

Have sold shares to the public through an Initial Public Offering (IPO), the process of a company first listing on a stock exchange. Examples include Apple, Alphabet, Meta, Exxon, and Johnson & Johnson. Anyone with a brokerage account can buy their stock.

Why companies go public. An IPO lets a company raise money from a much larger pool of investors than private funding alone allows, in exchange for giving up some ownership and taking on new reporting requirements. Once shares are listed, their price moves continuously as buyers and sellers trade throughout the day, reflecting the market's ongoing judgment of the company's value.

Once a company is public, its shares can be grouped and categorized in different ways — and combined with other investments like bonds and funds to build a diversified portfolio. See Custodians for where you'd actually go to buy shares.

Every portfolio is built from a small set of ingredients. Here's what each one is, how it behaves, and how they're typically grouped and compared.

Stocks

A small ownership share in a single company. Your return comes from price appreciation and, sometimes, dividends, and depends entirely on how that one business performs. Generally higher risk and higher potential return than bonds or money market accounts, since your outcome rides on a single company rather than a loan or a stable cash account.

Bonds

A loan you make to a government or company. In exchange, you're paid interest, and the loan is repaid at a set date. Generally lower risk and lower return than stocks, since you're owed a fixed payment rather than sharing in a company's upside.

Money market

A low-risk, highly liquid account that functions much like a savings account, used for cash you want to keep safe and accessible rather than growing aggressively.

How stocks get grouped

  • Region: US, EMEA, Emerging Markets, Asia
  • Sector: 11 standard industry groupings (GICS), e.g. technology, healthcare, energy
  • Market cap: Small, mid, or large, based on a company's total value

Small cap

Roughly under $2 billion in total value. More growth potential, more volatility.

Mid cap

Roughly $2–10 billion. A middle ground between growth and stability. Examples: Etsy, Roku.

Large cap

Roughly $10 billion+. Generally the most stable and widely held. Examples: Apple, Microsoft, Johnson & Johnson.

Index funds and ETFs: baskets of stocks, in one purchase

An index fund or ETF (Exchange-Traded Fund) holds many stocks (or bonds) at once, so one purchase gives you exposure to dozens or hundreds of companies instead of betting on a single one. That built-in spread is why index funds and ETFs are generally favored over single stock picks for most beginners — one poor performer doesn't sink the whole investment.

Benchmarks. Indexes like the DJIA, NASDAQ, and S&P 500 are scorecards that track how a slice of the market is performing overall. Many index funds and ETFs are built to simply track one of these benchmarks, and they're also commonly used to measure whether your own investments are keeping pace with "the market" as a whole.
Keep it simple. Instead of trying to pick the right single stock — or juggling small-cap, mid-cap, large-cap, and international funds — many investors start with a broad index fund or ETF that tracks the S&P 500. The S&P 500 represents the 500 largest and most profitable companies in the U.S., many of which earn revenue around the world. One purchase gives you a small slice of all of them, so your results aren't tied to the success or failure of any single company.

See Custodians and Taxable Brokerage Accounts for where you'd actually hold these building blocks.