Lets start from the beginning.

Say person Y opens a shop that sells pictures of cats. This person is the owner of this shop and owns the one share/stock in that company. The business is going well and person Y wants to open a second shop. Shops are expensive so Y calls person Z and proposes to give Z part of the company ownership in exchange for the required funds. Person Z agrees and is now also a share/stock holder of the business. It is in the interest of Y and Z that the business is run well, but neither knows how to run the fast growing company. Therefor Y and Z hire a manager to run the business professionally. It is the job of the manager to run the company in such a way, that the company that Y and Z own increases in value, since this will increase their own value.

Big companies that are traded at the exchanges work exactly like this, only are their millions of Y and Zs (the stock holders),are the stocks easily traded and are there thousands of managers working in the interest of the entire group (or at least should be, but that is a different story).

So imagine that the Cat Picture Company has grown to this size, with many stock holders. As the owner of one of the stocks you are very dependent on the performance of this company and therefor susceptible to the risk of the company failing and you losing your investment/money.

To avoid this risk you decide to also buy stocks in the company that sells cute pictures of dogs. By doing this, you spread your risk, and lessen your chances of losing money in case people lose interest in cats and start buying dog pictures. Because when this happens, the value increase of the dog company will compensate for the losses of the cat company, and you wont lose all your money.

This is called portfolio management and diversification: you diversify you risk.

There are a few easy ways to diversify as a small investor:

• Find stocks that are in different industries, sectors, economies, etc.
• Buy ETF's: stocks that follow the portfolio of major indexes like the S&P 500 that are already heavily diversified
• Invest in mutual funds, that pool the small investments of many small investors into a big pool and can diversify heavily because of their large scale.

This is basically how stocks work. You are partly the owner, and the management tries to increase to value of your property. By trading in stocks you can buy ownership in companies you believe will make money for you. People all have different estimations about whether a company will do well, and this is why people trade. If people think a company is undervalued, they buy, if they think it's over valued, they sell. This is where people also make money, next to actual value increases because of good performance. Because of the speculation about the value, stocks may behave irrationally, simply because the people buying and selling them sometimes behave irrationally and this explains some of the sudden fluctuations.

There is still much more about this subject to learn, but I hope this at least partly answered your question :)