What are stocks and how stock market works?: You want to start investing in stocks but don’t know where to start, so this article is for you.

This is an ultimate guide to stock market.

Everyone must have heard the word stocks in their life. “I have invested in stocks”, “Stocks are going up or down” or “stock market is crashing”. These are some phrases everyone hears at least once with some variations.  

In today’s unpredictable economy, it is a huge task to manage personal finances. Most people, including me, get confused about what to do with their savings. What can be the best possible use of extra money to make it more valuable?  

I got a degree in finance from The Knauss School of Business in Calafornia and have been working in the finance sector as a bank manager for almost 7 years now. Still, I have faced many struggles to manage my finances which I shared with you in my previous articles about personal finances and how I managed them through Zero-Based Budgeting planning and journaling. 

In the past few years, I have saved a significant amount of money, and I was looking for ways to make the best possible use of them. After consulting with my financial advisor and some other friends, I decided to invest my savings in buying stocks. I bought my first shares in multiple stocks of multiple multinational companies like Mcdonalds and CocaCola back in 2024 and after few complications I cracked this hard cookie of stock market. It is been 2 years and I am going smoothly with the process. 

First, I will tell you what stocks are and how they work in the easiest way possible. 

What are Stocks? 

According to the book definition of stocks published by Washington State Department of Financial Institutions :

The answer to the question what are stocks is: “Stocks are a type of security that gives shareholders a share of ownership in the company”. 

Let me elaborate on this definition for you with a real-life example. 

Let’s suppose you have a friend, Billy. Billy started selling fish and chips on a cart in a busy street near your house. Your tooth fairy has given you $5 (I still believe the tooth fairy gave that money even though it was mom). 

 Now, Billy has told you he wants to expand his business and introduce cheeseburgers too. He needs money for this. He asks you to give that $5 to him, and you will also be an owner in his little business. You will get profit according to your shares and the right to vote for any important decisions he will take for business. You gave your $5 to Billy, and now you own 5 pieces in his business. 

These 5 pieces are your 5 shares in Billy’s fast-food cart stock. You can resell them also. 

Now you own a little slice in Billy’s business. If he sells more, you may make a profit without even doing anything. If he expands his business and converts that little cart of him into a national or multinational fast-food chain, then you might sell your $5 shares in $50000. But if Billy’s cheeseburger tastes awful and his business went down, then oops your money too. 

Now you have understand that what are stocks and how they work in real world.

What is Equity: 

Our main topic is what are stocks but there are others terms related to this main term.

Now let’s turn to the second major terminology which is equity.: 

Equity is defined as the real ownership value. 

Mathematically, it is defined as the subtraction of Total liabilities from total assets. 

Total assets -Total Liabilities = Equity 

Equity is the actual value you own after settling all the loans, taxes, and liabilities. 

Relationship between Stocks and Equity: 

This concept is technical but simple. 

Stocks are the certificates or any other proof of ownership in a business or an organization; meanwhile equity is the actual value you own practically.  

Every stock represents equity, but not every equity represents a stock. 

In the case of Billy’s example, Billy owns a cart worth $70. 

Other cooking equipment: $30 

Groceries (Oil and spices etc.): $50 

Fish: $50 

Bags of Potato Chips: $30 

Now his total assets are: 

$70+$30+$50+$50+$30= $230 

But in this $230, he owes $30 to his fish vendor and $20 to his grocery supplier. 

So, after subtracting his liabilities from his assets: 

$230-$50= $180. 

Billy’s total equity is $180. 

You are the owner of 5 shares in Billy’s stock. It means you own 5% of his business. 

So, your equity is the product of the percentage of your shares and Billy’s total equity. 

$180 * 5%= $9 

Your total equity will be $9. 

Equity can be any asset you own, even your house and car etc., but stocks are the pieces you own in a public organization by purchasing the shares. 

Now that you have understood the basic concept of what are stocks and equity, we will take a step further into understanding stocks.  

How to make money from stocks: 

The first and most common practice of making money from stocks is reselling them at a higher price. 

For instance, Billy’s burger has become a hit, he changes his cart into a restaurant, and now more people want to purchase shares in Billy’s stock. 

Billy set a price of $5 for each of his shares. That is the Ask Price.  

But the buyer offers $3 for each share. That is the Bid Price. 

The difference between Bid and Ask price is known as Spread. 

Now the key factor here is, if more people want to buy shares in Billy’s stock, the prices will rise and if more people are willing to sell their shares, then the prices will fall. 

Now are getting to understand what are stocks and how they can be used to make money.

Role of Market Makers in Stocks: 

To completely understand what are stocks you need to understand the role of other entities involved in the process.

Market makers are the third party involved between buyers and sellers. They usually make a profit from the spread. Like if the spread is $2, a market maker will purchase a share of Billy’s stock at $3 and sale it at $5.  

There is also another way to make money from stocks. These are called Dividends. 

What is a Dividend? 

Dividend is the money a company sends you for having their shares in your brokerage account.

For example, if Billy makes $500 in a month after subtracting all the liabilities and he decides to reinvest $300 back in business and remaining $200 to share among the owners and shareholders. 

As you have 5 shares in Billy’s stock, you will get 5% of $200 without even doing anything. 

But you must keep it in mind that growing companies often reinvest in the business, mostly financially stable, and old companies pay dividends to their shareholders. 

Two animals in stock market terminology: 

You will hear about two animals in the stock market all the time. 

One of them is Bull, charges upward, furious and full of motivation and energy. So, when market is going up, they call it Bull Market. 

The other one is Bear. Bear is kind of lazy and swipes backward and likes to stay in hibernation. So, when the market is going down, stock market gurus call it Bear Market. 

Real Life Examples: 

Recently, amid Iran War, Stock markets have seen a huge crash. 

March 2026 is considered black month for stock markets because it lost roughly $7 trillion from global stocks making bear markets just after 5 weeks of this war. 

According to an article published by Investing.com: 

Bulls Markets and strong economies are shocked by the American-Iran tensions. 

Risk Factor: 

Stock Market is a very layered and complex process and you cannot simply understand what are stocks and how they work in a single day or single sitting. It involves high risk factors but if you are ready to take calculated risks and make money from your savings, it can be a good option for you.  

For a complete understanding of what are stocks and how market works, stay connected with us.