Imagine you are able to purchase individual units of equity in a company that allows you to co-own that company with thousands of other investors. Now picture your company puts out a news release that draws attention from outside forces and now they want those units and are willing to buy them from you for more than you paid for them. In this instance, it is up to you to decide whether to hold onto those units in the hopes that their value continues to increase, or you can sell them to someone through a broker and pocket the difference.

In trading, those units of equity are known as “shares,” and their value is based entirely on simple economics: supply and demand. There are many factors that go into determining the price of the shares — number of shares available to the public is a biggie — but the fair market value (FMV) is almost always based on how much people are willing to pay vs. how much people are willing to part with the shares they already own. (See more on this in my Level 2 post.)

The way I like to describe this scenario is for you to imagine the company as a great big bowl of Skittles, wherein each Skittle represents a single share. Let’s say you own 100 Skittles of Company X and someone comes along wanting to buy those Skittles. If you decide to sell your Skittles to said buyer, this execution is known as a “trade” — you are trading your 100 shares of Company X in exchange for money and both parties end up getting what they want.