How Do People Lose Money on the Stock Market?

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What is the Stock Market?

  • A "stock market" is essentially a place where investors can trade securities, generally in the form of shares of company stock. The actual process by which the securities are traded can happen in person, where stock market professionals exchange the stocks in real time on the market floor, or virtually through the use of computers. The most famous stock market, the New York Stock Exchange (NYSE), is found in America and is located on Wall Street. There are, however, many other stock exchanges in other countries around the world.

What is Stock?

  • The term "stock" refers to a share of ownership in some private entity. For example, a person who owns stock in Microsoft Corporation, whose stock symbol is MSFT, owns a certain percentage of that company. If they own one share of the stock, and there are 100 shares in existence, then they own 1 percent of the company. Most large companies, however, have millions of shares of stock in circulation.

Why is Stock Important?

  • Stock is important because it allows companies to raise money through the private sector. Say, for example, that a person forms a company and develops a revolutionary pharmaceutical drug that will cure cancer. Sadly, however, the company in question doesn't have the resources to begin manufacturing the drug for mass consumption. How does the company raise money to do so? One means of doing so is to "go public" with the company by selling stock shares of it to investors. This is how corporations are formed.

How Do People Lose Money in the Stock Market?

  • Just as it's possible to make a large amount of money by investing in the stock market, it's also possible to lose money. If an investor invests a large amount of money in stock shares of one company, and then that company falls on hard financial times or goes out of business, the investor will lose the money they had invested in that company. This is because of the fact that the company itself has become less valuable, which means that each individual share of stock that the investor owned in that company has also lost value.

  • Photo Credit Ramy Majouji, Wikimedia Commons
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