What is stock?

Stock is, in essence, a piece of a company. If you were to divide a company into 100 pieces and sell some of those pieces, you would have issued stock in said company. Whoever owned 51 of those pieces (51% of the outstanding shares - you if you're smart) would be the controlling shareholder. The controlling shareholder would essentially have control over the company's operations.

Why do stocks rise and fall in value?

The price of stocks is dictated by supply and demand. If a company is in high demand (i.e. if more people want to buy than sell), the stock will become scarce and its price will rise. Conversely, if shares are for sale than people want to buy, the price of a stock goes down. In this case, the sellers must accept a lower price due to lower demand.

What is an index?

An index is a model that is believed to show how the market should perform. For instance, the Dow Jones Industrial Average is an index of 30 blue chip stocks which are traded in the US. The idea is that by looking at the performance of these particular stocks, one can get an idea of what the market as a whole will do. The S&P 500 (Standard and Poors 500) is another index, comprised of 500 stocks and used as a standard of comparison for one's investment performance.

What is an exchange?

An exchange is where stocks are traded. For example, NASDAQ (National Association of Securities Dealers Automated Quotations System) is an electronic exchange where most securities stocks (and any stock with a four-letter symbol) are traded.

What is a symbol?

A symbol is a name under which a stock is traded. For the sake of brevity, a symbol is usually much shorter than the company name. Examples are "KO" for Coca-Cola, "BUD" for Anheuser-Busch, and "MSFT" for Microsoft. When you check a stock price on a ticker, you use the symbol to identify the stock.

What does "blue chip" mean?

A blue chip stock is a stock that is generally considered a safe bet because it is in great financial shape and established as a leader in its field. Coca-cola (KO), Berkshire Hathaway (BRKa), and Wal-Mart (WMT) are all blue chip stocks. Blue chip stocks usually pay dividends.

What is a dividend?

A dividend is a portion of a company's earnings paid to its shareholders. Usually, a most companies pay these dividends 4 times a year (quarterly), and if you own stock in that company, you will receive a small amount of money for every share that you own. Most blue chip stocks are known for paying dividends to their shareholders.

I heard the other day about a stock that "split." What does that mean?

A stock "split" basically means that the company increased the number of shares in the company. If you own 100 shares of a company at $75 a share ($7500 worth) and the company issues a 3-to-1 split, you now have 300 shares at $25 a share (still $7500 worth). What difference does this make? This often leads to increased liquidity, which means more shares of the company are bought and sold. Some companies want increased liquidity because they want their stock to be accessible to more people (more people can afford a $25 stock than a $75 stock). Other companies still feel that increased liquidity means increased volatility -- more wild gains and losses. For this reason, these companies (including Berkshire Hathaway) have no-split policies. Since they never divide the price of their stock, they have a stable shareholder base.