If the thought of investing in the stock market scares you, you are not alone. Individuals with very limited experience in stock investing are either terrified by horror stories of the average investor losing 50% of their portfolio value—for example, in the two bear markets that have already occurred in this millennium1 —or are beguiled by "hot tips" that bear the promise of huge rewards but seldom pay off. It is not surprising, then, that the pendulum of investment sentiment is said to swing between fear and greed. The reality is that investing in the stock market carries risk, but when approached in a disciplined manner, it is one of the most efficient ways to build up one's net worth.2 While the value of one's home typically accounts for most of the net worth of the average individual, most of the affluent and very rich generally have the majority of their wealth invested in stocks.3 In order to understand the mechanics of the stock market, let's begin by delving into the definition of a stock and its different types.

A stock or share (also known as a company's "equity") is a financial instrument that represents ownership in a company or corporation and represents a proportionate claim on its assets (what it owns) and earnings (what it generates in profits).4 Stock ownership implies that the shareholder owns a slice of the company equal to the number of shares held as a proportion of the company's total outstanding shares. For instance, an individual or entity that owns 100,000 shares of a company with one million outstanding shares would have a 10% ownership stake in it. Most companies have outstanding shares that run into the millions or billions.

"Intrinsic value" is a philosophical concept, wherein the worth of an object or endeavor is derived in and of itself—or, in layman's terms, independent of other extraneous factors. Financial analysts build models to estimate what they consider to be the intrinsic value of a company's stock outside of what its perceived market price may be on any given day. The discrepancy between market price and an analyst's estimated intrinsic value becomes a measure for investing opportunity. Those who consider such models to be reasonably good estimations of intrinsic value, and who would take investing action based on those estimations, are known as value investors. Some investors may prefer to act on a hunch about the price of a stock, without considering its corporate fundamentals. Others may base their purchase on the price action of the stock, regardless of whether it is driven by excitement or hype. However, in this article, we will look at another way of figuring out the intrinsic value of a stock, which reduces the subjective perception of a stock's value by analyzing its fundamentals and determining the worth of a stock in and of itself (in other words, how it generates cash).

Stock exchanges are secondary markets, where existing owners of shares can transact with potential buyers. It is important to understand that the corporations listed on stock markets do not buy and sell their own shares on a regular basis (companies may engage in stock buybacks8 or issue new shares,9 but these are not day-to-day operations and often occur outside of the framework of an exchange). So when you buy a share of stock on the stock market, you are not buying it from the company, you are buying it from some other existing shareholder. Likewise, when you sell your shares, you do not sell them back to the company—rather you sell them to some other investor. The first stock markets appeared in Europe in the 16th and 17th centuries, mainly in port cities or trading hubs such as Antwerp, Amsterdam, and London.10 These early stock exchanges, however, were more akin to bond exchanges as the small number of companies did not issue equity. In fact, most early corporations were considered semi-public organizations since they had to be chartered by their government in order to conduct business. In the late 18th century, stock markets began appearing in America, notably the New York Stock Exchange (NYSE), which allowed for equity shares to trade. The honor of the first stock exchange in America goes to the Philadelphia Stock Exchange (PHLX), which still exists today.11 The NYSE was founded in 1792 with the signing of the Buttonwood Agreement by 24 New York City stockbrokers and merchants. Prior to this official incorporation, traders and brokers would meet unofficially under a buttonwood tree on Wall Street to buy and sell shares.12 The advent of modern stock markets ushered in an age of regulation and professionalization that now ensures buyers and sellers of shares can trust that their transactions will go through at fair prices and within a reasonable period of time. Today, there are many stock exchanges in the U.S. and throughout the world, many of which are linked together electronically. This in turn means markets are more efficient and more liquid. There also exists a number of loosely regulated over-the-counter exchanges, sometimes known as bulletin boards, that go by the acronym OTCBB. OTCBB shares tend to be more risky since they list companies that fail to meet the more strict listing criteria of bigger exchanges.13 For example, larger exchanges may require that a company has been in operation for a certain amount of time before being listed, and that it meets certain conditions regarding company value and profitability.14 In most developed countries, stock exchanges are self-regulatory organizations (SROs), non-governmental organizations that have the power to create and enforce industry regulations and standards.15 The priority for stock exchanges is to protect investors through the establishment of rules that promote ethics and equality. Examples of such SRO’s in the U.S. include individual stock exchanges, as well as the National Association of Securities Dealers (NASD) and the Financial Industry Regulatory Authority (FINRA).