The Free Lesson: Start Here
1. What Market Primer is
Market Primer explains how markets work in plain language. Each short lesson covers one idea, such as what a share is, what a bond pays, or why prices move up and down, using everyday examples like pizza shops, IOUs, and snack packs.
An education-only note: we teach concepts, not picks. You won't find tips, predictions, or suggestions about what to do with your money here. Every example uses hypothetical numbers, and nothing in this primer considers anyone's personal situation. Investing involves risk, including the loss of money.
This primer is a quick tour of the basics: stocks, markets and indexes, bonds, and funds. Video lessons for each section are coming soon.
2. What a stock is
A stock is a small slice of ownership in a company.
Picture a hypothetical pizza shop worth $100,000. The owner divides that value into 100,000 equal slices, called shares, so each one represents about a dollar of the business. Own one share and you own one hundred-thousandth of the shop: a sliver of its ovens, its recipes, and its future results, good or bad.
Why companies sell shares. Companies often sell shares to raise money, for example to open new locations. The first time a company sells shares to the public is called an initial public offering, or IPO. After that, shares can trade between investors.
Why prices move. A share's price is simply the most recent price a buyer and a seller agreed on. When more people want to own a share than want to part with it, the price tends to rise. When more want out, it tends to fall. Company results, news, interest rates, the wider economy, and plain emotion can all change how people feel.
How shareholders can be affected. If a share becomes worth more than its purchase price, the owner has a gain on paper; if it's worth less, a loss. Some companies also pay dividends, a cash share of their profits. Dividends aren't promised. Companies can cut or stop them, and many never pay one.
The risks. Share prices can fall, sometimes sharply and for long periods. If a company fails, its shares can become worth nothing. Owning a single company means the outcome rides on that one business.
▶ Video lesson coming soon: What Is a Stock?
3. Markets and indexes
Exchanges are organized marketplaces where shares trade. Think of a giant, very orderly farmers market with posted hours, listing rules, and a manager making sure the scales are honest. Regulators oversee exchanges, though no rule removes the risk of prices falling.
Brokers are the agents most people use to reach the market, a bit like a real estate agent placing an offer on your behalf. Brokers get paid through commissions, fees, or other arrangements.
Bid and ask. At the farmers market, a shopper offers $3.00 for apples (the bid) and the vendor asks $3.10 (the ask). The ten-cent gap is the spread. When one side meets the other's price, a trade happens.
Order types, explained. A market order asks to be filled right away at the best available price, which can differ from the last price you saw. A limit order sets a price ceiling or floor and may never fill. One leans toward speed, the other toward price control, and neither prevents losses.
Indexes are like a grocery receipt for a basket of stocks. Rather than tracking one apple, you track the total bill for a standard basket. A broad index of about 500 large U.S. companies, such as the S&P 500, weights bigger companies more heavily. An index is a measuring stick, not something you own directly. Broad indexes have often risen over long periods, but not always, there have been long stretches of declines, and there's no guarantee about the future.
Reading a price chart. Many charts show each day as a candle with four prices: open, high, low, and close. A common convention: a candle that closed above its open is drawn hollow, and one that closed below its open is drawn solid. Any example chart we show is labeled "Hypothetical example data."
Charts describe the past. They don't predict what comes next.
▶ Video lesson coming soon: How Stock Markets Work
4. Bonds
A bond is an IOU. Instead of owning a slice of a company, the bondholder has lent money to a government or a company.
Imagine a friend borrows a hypothetical $1,000 and writes: "I'll pay you $50 a year for five years, then give you the $1,000 back." That note has every main part of a bond:
- Issuer: the borrower (your friend, or a government, city, or company).
- Principal (face value): the $1,000 scheduled to be repaid.
- Coupon: the $50 a year of scheduled interest, here 5% of face value.
- Maturity: the date the principal is due, five years from now.
Credit ratings are like report cards for borrowers. Higher grades mean a rating agency judges the risk of nonpayment to be lower; lower grades usually mean the borrower has to offer more interest. Ratings are opinions and can change or be wrong.
Coupons aren't guaranteed. If an issuer can't pay as promised, that's a default, and bondholders may get back some, all, or none of what they're owed.
The rate seesaw. Bonds can be resold before maturity, and their prices move. If new bonds start paying 5% while an older bond pays 3%, the older bond usually has to sell at a lower price to attract a buyer. When rates rise, existing bond prices typically fall; when rates fall, they typically rise. Bonds are often described as steadier than stocks, but their prices can and do fall.
▶ Video lesson coming soon: What Is a Bond?
5. Funds and ETFs
A fund pools money from many people and uses it to hold many investments at once. Each fund share is a proportional slice of everything inside.
Think of a variety snack pack. Friends chip in for a box with a little of every flavor, and each person gets a share of the whole box. If one flavor is stale, it doesn't ruin the pack. But if the whole factory has a bad batch, every flavor can be affected. Spreading money across many holdings can reduce the impact of any one company's trouble, but it never removes risk. Diversified funds can and do lose value, sometimes for long periods.
Index vs. active. An index fund follows a recipe card: it aims to hold whatever is in a particular index. An active fund relies on a manager, like a chef hand-picking snacks, trying to do better than a benchmark. Index funds usually cost less; active funds may do better or worse than their benchmark. S&P Dow Jones Indices SPIVA reports (SPIVA research) have found that, historically, many active funds trailed their benchmarks after fees over long periods, but not all, not always, and the past doesn't guarantee the future.
Fees. The expense ratio is a yearly fee taken from the fund's assets. At a hypothetical 0.5%, that's about $5 a year for every $1,000, charged in up years and down years.
Mutual funds vs. ETFs. A mutual fund is priced once a day after the market closes, at its net asset value (NAV), like a bakery handing out orders at closing time. An ETF trades on an exchange all day like a stock, with a price that can change minute to minute. Either can go down as well as up.
What's inside. Funds publish their holdings, like the ingredient label on the snack pack. A fund's name doesn't tell the whole story; its holdings list and stated goal do.
6. Words you'll hear
More terms in the Market Primer Glossary.
- Share: one unit of ownership in a company.
- Dividend: a cash payment some companies make to shareholders; it can be cut or stopped.
- Exchange: an organized marketplace where shares and other investments trade.
- Bid / ask: the highest price a buyer currently offers and the lowest a seller currently accepts.
- Index: a measuring stick that tracks the combined value of a basket of investments.
- Market cap: a company's share price times its number of shares, the size of the whole pie.
- Bond: an IOU from a government or company that pays scheduled interest.
- Coupon: a bond's scheduled interest payment, which depends on the issuer's ability to pay.
- Yield: a bond's scheduled income described relative to the price paid.
- Expense ratio: a fund's yearly fee, shown as a percentage of assets.
- Volatility: how much and how quickly a price tends to move up and down.
7. Three common myths vs. facts
Myth: A stock is a loan to a company. Fact: A stock is ownership. A bond is the loan. Owners share in a business's ups and downs; lenders are promised set payments, which can still be missed.
Myth: Bonds can't lose money. Fact: Bond prices can fall, especially when interest rates rise, and issuers can default. Holding a bond to maturity only returns the face value if the issuer pays in full.
Myth: Owning a fund means you can't lose. Fact: A fund spreads money across many holdings, which can soften the hit from any one company, but broad market declines can pull most holdings down together. Funds can lose value.
8. Recap
- A stock is a slice of ownership; its price moves with supply and demand, and it can fall to zero.
- Exchanges are organized marketplaces, brokers route orders, and indexes are receipts for a basket of stocks.
- Charts describe past prices; they don't predict.
- A bond is an IOU with an issuer, principal, coupon, and maturity; coupons aren't guaranteed and defaults can happen.
- When interest rates rise, existing bond prices typically fall, and vice versa.
- Funds pool money into a variety pack; spreading out can reduce some risks but never removes them, and fees apply every year.
9. Next steps
Follow for the next lesson at @MarketPrimerHQ. New lesson weekly.