This piece is written for those who have never dove into the stock market, those that hate Wall Street, and those that want to know what the hype is about.

If you know nothing about the stock market, you still probably know that it works a bit like a casino, but with better odds. In fact, over time it is nearly impossible to lose money in the stock market. I will explain why later, but first I will cover the basics – questions you probably have if you have never participated in the market. Keep in mind that this is not financial advice; it is for educational purposes.

What determines the price of a stock?
If a share of Microsoft is currently worth $230, who determines that? Quite simply, it is the price of the last trade that took place. Every stock has a bid price (the most a buyer is willing to pay) and an ask price (the least a seller is willing to accept). On popular stocks, these prices are usually very close, often differing by a penny or two. With less popular “low volume” stocks the spread is wider. What makes the price go up? If a company just reported great news, people often want to own a piece of that. As a result, the pool of buyers suddenly increases, while the pool of sellers typically decreases. This results in both higher bid and higher ask prices, causing the price to rise. The reverse is true when a company reports bad news.

How do you buy a stock?
Buying stocks requires a brokerage account. Fidelity and TD Ameritrade are two providers, though there are many more. Accounts are usually free and even trading stocks is free with the majority of brokerages.

When you wish to purchase a stock, you can choose between a “market order”, where you agree to buy at whatever the current asking price is, or a “limit order” where you set the price you wish to pay and if the market can match you with a seller at that price, the trade happens. The reverse is true for when you are selling a stock. Market price orders can be risky because you are trusting that the current asking price is reasonable, whereas with a limit order you are guaranteed to pay no more than what you set for your price. Sometimes your broker gets you a “price improvement”, meaning they got the trade done at a price below your limit, saving you money. Below is an actual order ticket from the broker TD Ameritrade. This is what you see when you wish to purchase a stock:

It can be overwhelming to a beginner but not to worry – here’s what all this stuff means: Starting at the top is the ticker GSL – every company on the stock market uses an abbreviation called a stock symbol, or ticker. Here you enter the ticker of the company you wish to buy. To the right is the current selling information on this symbol: the bid and ask prices I mentioned earlier, the last trade price, how much it has changed today, and the number of shares traded today (Vol).

Below this is where you order information is. The Action is “Buy” (if you were selling your stock, you would change this to “Sell”). Next is the quantity of shares we wish to purchase (not entered yet), again confirming the ticker, then the order type I discussed above the graphic, the limit price I wish to purchase for (not entered yet), and when the order should expire (default is the end of the trading day but you can usually set an order to expire as far as 6 months into the future). The bottom row provides options for routing the order which are not important for this piece. That is the purchase process in a nutshell.

What does a bear market or a bull market mean?
The two beasts are used to summarize how the overall market has performed in a recent period. During periods where most stocks are rising, it is called a bull market. Think of it as a bull charging ahead. During periods where the market is falling or stagnant, which reflect current conditions, this is considered a bear market. Think of it like a bear hibernating for the winter and not bothering with the stock market. Whether the market is a bear or a bull can be affected by factors like the global economy, wars, and overall market sentiment (eg. have prices risen too fast too quickly?).

How do you make money in the stock market?
Money is made on stocks in two ways: When the price of a stock you own goes up and you sell it at a profit, and when a stock you own pays a dividend. Think of dividends as profit sharing for shareholders. Most long-established companies that are profitable pay a dividend. The amount varies by company and is measured by a percentage called “annual yield”. This is the percentage of the stock price that is paid out each year in dividends. If a stock was worth $100 and the company paid a $2/yr in dividends, it would result in an annual yield of 2%. If the stock jumped to $150, you would still be paid the $2/yr but the yield would now be 1.3%. However, companies often increase the dividend over time to keep the annual yield competitive. Various industries are known for higher or lower dividends: Tech stocks are known for low (>2%) dividend yields, while shipping stocks are often bought specifically for their generous dividends which in some years can exceed 25%.

How do you lose money in the stock market?
You lose money in the stock market when a stock you own goes down in price – and you sell it. If you do not sell it, you have not yet lost money – the losses are only on paper. The stock market ebbs and flows, it has spikes and it has slumps. Unlike at a casino where you can theoretically lose forever until you are broke, over time the stock market always goes up. I’ll show you proof at the bottom of the page. In the meantime, if you buy a stock for $100, and sell it once it falls to $50, that is one way to lose money. Stocks generally do not fall to zero so it is difficult to lose all of your money by merely buying and holding stocks.

How do big banks and hedge funds make money in ways the little guy cannot?
There are several ways this happens, but the main method is by simply executing trades faster than you or I can. First, large money managers pay big bucks to have their trading servers located as close to the stock exchange’s trading servers as possible so their trades will go through first before the rest of the market. Next these same big money managers contract with brokerages (such as Robin Hood) to pay for order flow. In other words, if you are a Robin Hood customer, when you submit an order, these big-shot money managers see the order before the rest of the market does. This enables them to act with market momentum before the rest of the market sees it. In most cases, these gains are merely pennies per share, but when you are doing this tens of thousands of times per second across the entire market, those pennies add up very quickly. The other way big-shot money mangers and funds make money is through arbitrage. Arbitrage occurs when the price to buy a stock and the price to sell the same stock are temporarily different. Their super-fast servers running automated software see this anomaly and quickly execute trades to skim the difference. Over time this adds up to substantial dollars.

How did Bernie Sanders try to put an end to this practice?
During his presidential run, Bernie suggested a small tax of 0.5% on all stock trades. For you and I, this amounts to something negligible that would hardly affect us in any meaningful way. For example, if you chose to purchase $1,000 worth of a stock, the tax would have been just $5. But for those super-computer big-shot traders? This would spell the end of the practice entirely. If you are trying to skim pennies on a $30 stock, it becomes totally unprofitable when you are paying a 15¢ tax on each trade. Bernie’s tax would have destroyed the high-speed trading market and put substantial power back into the hands of everyday mom and pop investors. But Bernie did not win, and the rest is history.

I have heard the term “short selling” and “shorting a stock”. What does that mean?
Typically, investors buy stocks in hopes that they will go up. But what if you know a company is about to have a bad quarter or you believe their products stink? You can bet against them and profit if the stock goes down. This is called short selling. When you short sell you are essentially borrowing and then selling shares of a company in advance for the current price with the promise that you will pay for the shares (i.e. cover) once the price (hopefully) goes down. Short selling carries tremendous risk because if a stock you short sell goes up, you can end up paying substantially more for the stock to cover your short than you originally sold it for.

For example, let’s say you think Netflix is dying and want to short sell it. NFLX is priced at $307. You short sell 100 shares. Your receive $30,700 for the “sale” but you are essentially in debt and must buy back (cover) those 100 shares at some point – preferably for less than you sold them for. There is no time limit to do so but you must keep the equivalent of cash and stocks for that amount in your account as collateral, so this amount is tied up until you buy back the shares. Two weeks later you are in luck and NFLX drops $57 to $250. That is a profit of $57 per share and you can cover the 100 shares for only $25,000 with the $5,700 difference being your profit. Not bad. But what happens if NFLX instead shoots up to $500? Instead, you’ve lost $193/per share. You would have to buy back the shares you shorted for a whopping $50,000 – a loss of $19,300! But you say to yourself “Don’t worry it will go back down. I’ll wait to cover.” Except instead it rockets to $1,000. Now you have lost nearly $70,000! Because stocks do not have a maximum price, your potential losses are essentially unlimited when you short a stock and it goes up. For this reason, I personally avoid shorting stocks under any circumstances.

How is the market like a casino and how do you make a ton of money in the stock market?
Besides buying and selling stocks, the market provides opportunities that are far more casino-like. They are called options. An option is essentially a bet on what a stock’s price will be at a specific time (aka the expiration date). For example, if a stock is currently priced at $30 I can place a bet that the stock will be above $40 by January 23, 2023. If I am right, on the expiration date of January 23, 2023 I will have the right to buy the stock for $40 even if its price is $100 at the time. However, if the stock is priced below $40 on January 23, 2023, I lose the entire bet. Here’s an actual example so you can see how it works and why options are more like gambling than investing:

GSL stock is currently trading at $18.84. If I wish, I can purchase options (i.e. place a bet) that the stock will be over $20 by March 17, 2023. The more the stock is over $20 on that date, the more $ I win. Options come in two flavors: A call is a bet that a stock will go up by the expiration date, and a put is a bet that a stock will go down by expiration (similar to short selling). In this case I want to buy a call with a “strike price” of $20 – that’s the price we need to be over to win. Some stocks allow bets to be placed with expirations every week, while others like GSL only offer a single expiration date each month.

We go to our brokerage to place the order. Options are priced based on what the market feels is their chance of winning. Options with little chance of winning will usually sell for pennies, while options that are nearly sure to win will cost much more. At the same time, options with little chance of winning pay out massively if you win while those that are near certain pay much less. Check out two scenarios with the same stock:

Stock is $18.84. We bet that it will be over $20 by March 17, 2023.
A $20 call expiring 3/17/23 has a bid of $1.40 and an ask of $1.55. If I enter a limit price of $1.55 I will almost certainly get the bet approved (i.e. my order will be filled). I could also enter a price of less than $1.55 in hopes a seller will drop their asking price but I also run the risk that the price keeps going up and I end up having to pay more than $1.55 to place the bet. To be safe, I enter a price of $1.55 and choose to purchase 50 options. Each option represents the right to purchase 100 shares of the stock at the strike price no matter what the actual price is. So 50 options gives me the rights to 5,000 shares at $20. Fast forward to March 17, 2023 and GSL stock is now worth $29…

• Cost of the bet: $1.55/option x 50 options x 100 shares per option = $7,750
• Gross profit per share: $29 at expiration – $20 option strike price = $9/share
• Net profit: $9/share x 50 options x 100 shares per option – $7,750 options cost = $37,250
• In this scenario, I made about 5x my money. My maximum loss would have been $7,750.

Stock is $18.84. We bet that it will be over $40 by December 16, 2022.
A $40 call expiring 12/16/22 has an ask of just $0.05. Because of the very high strike price and the small one-month window for it to hit, the chances of winning are very low, so the option is cheap. I enter a price of $0.05 and choose to purchase 1500 options, which will cost me about the same as the prior scenario. My 1500 options give me the rights to 150,000 shares. Fast forward to December 16, 2022 and GSL stock is worth $49. Even though the difference between the stock price and the strike price is the same ($9) as the prior scenario, watch how different the payout is because the risk was so much greater…

• Cost of the bet: $0.05/option x 1500 options x 100 shares per option = $7,500
• Gross profit per share: $49 at expiration – $40 option strike price = $9/share
• Net profit: $9/share x 1500 options x 100 shares per option – $7,500 options cost = $1,342,500
• In this scenario, I made about 180x my money. My maximum loss would have been $7,500.

That’s right. You just saw $7,500 turn into $1.3 million in a month’s time. That is why options are a gamble, bringing great rewards with their outsized risk. There are many more nuances to learn about options. They can be traded themselves like stocks at any time – you do not have to wait until expiration. You can choose strikes prices that are already lower than the current stock price (these options pay the least because the bet is already winning). You can also place combination bets known as straddles and strangles. But for this beginner discussion, this covers most of what you need to know. It is important to understand that options are very risky – your entire bet is at risk – and should only be placed by experienced stock traders who understand the risks.

Is the stock market rigged?
Big players will often try to rig the market in their favor, and there are various ways to do so. In some instances and with some stocks, it is easier than with others. Here is CNBC’s Jim Cramer, admitting to how he himself did this back when he managed a hedge fund. Other ways in which big players aim to influence a stock’s price include flooding messages boards with positive or negative comments about a particular stock. Most recently, Twitter’s disastrous Twitter Blue Verified launch allowed anyone to easily impersonate major companies. One user impersonated insulin manufacturer Eli Lilly:

The stock immediately dropped $10 and has yet to fully recover, even after it was obvious that the tweet was not legitimate. Did the impersonator short sell the stock before making the bogus statement? Probably not, but the opportunity was there and it proves how volatile the market can be in the face of big news.

You said it is impossible to not make money in the market over time. How?
Besides buying stocks and options, another asset that you can purchase is an index fund. Index funds allow you to own many stocks at once under a single ticker. Some index funds are industry-specific. One such index, TAN, allows you to invest in all solar stocks at once. Others such as VTI allow you to purchase a fraction of every single stock in the whole market at once. The most popular index fund is SPY which allows you to purchase a fraction of the entire S&P 500. Index funds are considered to be among the safest assets to buy for several reasons: You are not beholden to the performance of a single company but instead diversified among many. But the bigger reason why index funds like SPY are a reliable investment is because each week when you and your co-workers’ retirement contributions hit the market, that money is hitting stocks in these index funds. That obscure pot stock your friend told you was a must-buy? None of those sweet retirement contributions are buying that junk, but they are buying the most well-known stocks. When you own an index fund, all that retirement money is going towards assets you own, driving the price up over time. Here is a chart of the S&P 500’s performance over the last 90 years.

You can see, despite depressions, recessions, and COVID, the index relentlessly goes up over time. Plus, this chart does not include all the dividends you would have been paid by the companies in the index, which compounds your profit even further. Overall, SPY and index funds like it deliver around a 9.5% return annually, which far exceeds any savings account, CD, or bond. Of course, there is risk. If a nuclear bomb struck NYC, it’s near-certain that the market would crash substantially, whereas the money in your savings account will be worth the same it was before the event. There are also, as the chart depicts, extended periods where the index did not grow in value. In the event you suddenly needed to cash out your investments, the timing could result in a loss. The bottom line is, with any investment it is important to understand the risks involved. If you cannot afford to lose it, don’t invest it.

The stock market involves more than what I have covered in this piece. But for those that wondered what all the hype was about and why so many folks trade equities, I hope this provided you with a fair view of the possibilities the stock market offers.