The stock market—where buyers and sellers can trade shares of public companies—is one of 4 financial markets, along with the bond market, commodities market, and derivatives market. Over time, the stock market has offered one of the most powerful opportunities for investors to grow wealth. There are entire books dedicated to explaining how the stock market works, but if you’re looking for the basics, we’ve got you covered here.
What is the stock market?
Put simply, the stock market is the collection of all of the places the general public can buy and sell stocks. This includes stock exchanges, like the New York Stock Exchange (NYSE) and Nasdaq, which are the behind-the-scenes facilitators of most trades people place within their investment accounts, as well as “over-the-counter" trades between individuals outside of exchanges.
When you hear people and the media discuss the stock market, they're often referring to one of a handful of indexes that track the collective price movements of large and significant companies' stocks, such as the S&P 500 or Dow Jones Industrial Average. Because the companies within these indexes carry so much clout, the indexes are generally considered good indicators of the overall state of the entire stock market.
How does the stock market work?
Think of the stock market as a kind of matchmaker. Each day it's open, it pairs stock sellers with interested buyers. Sellers can be companies offering their own stock, like through an initial public offering (IPO) or direct listing, or, more commonly, other individuals looking to resell shares they previously bought. When a match is made, the exchanges provide what's called “liquidity” by enabling people to exchange investments they own for cash.
Because it involves buyers and sellers, the stock market may seem like a store, where you buy stocks instead of food or home goods. But there's a key distinction: The stock market is a true open market. This means unlike with a typical retailer, which has fixed prices, in the stock market, buyers and sellers are constantly negotiating (and then renegotiating) prices in response to new information and demand. Over the years, this process has evolved from in-person haggling to phone negotiations to today's largely digital trades handled by powerful software to offer optimal pricing to both buyers and sellers.
To better understand how stock market price maneuvering works, whether IRL or over the internet, it's helpful to keep 2 important numbers in mind: the ask and the bid.
- The ask is the amount the seller wants to receive for their stock.
- The bid is what the buyer hopes to pay.
If the ask is greater than the bid, no sales will occur. For the stock in question to change hands, the seller would have to come down on their price or the buyer would need to raise theirs.
You can also buy or sell with a market order. These are automatically executed at the ask if you're buying or the bid if you're selling. If your order size is larger than the share quantity of the bid or ask, you may pay more per additional share when buying or receive less when selling. Market orders can be risky, though, as the bid or ask could move right as you place a trade, changing your price. You can also hold out for a particular price using a stop, limit, or other more sophisticated order type.
Why do people participate in the stock market?
Investors use the stock market to help their money grow. Going back more than 100 years, the S&P 500 has risen an average of about 10% each year.* (Keep in mind that includes many years when prices have gone down.) That kind of growth can not only fend off the diminishing creep of inflation—the rising prices that eat into your dollar's buying power—but it can also help you reach financial goals you might otherwise have to save a lot more money for.
It's important to remember that buying and selling stocks carries risks you wouldn't have with a normal bank account, where your balance is insured against loss. Stock market returns are never guaranteed, short-term performance can differ from long-term averages, and you may lose some or all of what you invest. And of course, what's happened in the past (think: those 10% average returns) won't necessarily happen again. A diversified portfolio and a well-planned investment strategy could help you decrease these risks.
Is the stock market regulated?
Yes, the stock market is regulated. In the US, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) create rules and guidelines for all stock market participants, from large companies and investment funds to everyday investors. These regulations aim to protect investors and maintain fair and efficient markets. For example, the SEC monitors large market participants, like banks and funds, to ensure honesty and prevent them from manipulating the markets unfairly.
FINRA also regulates those in the financial services industry who work in the markets. Registered representatives, for instance, must pass their own set of FINRA-administered exams about the rules and regulations of trading. This helps protect you by making sure those managing your accounts or trades are well-informed.
Stock market hours
Major US stock exchanges, like the NYSE and Nasdaq, are typically open from 9:30 a.m. to 4:00 p.m. Eastern time, Monday through Friday, excluding holidays. You can find answers to questions about exchanges' hours and any days they're closed on their websites. Depending on where you hold your investment account, you may also have access to extended-hours trading that lets you buy and sell securities outside of normal business hours.
How to invest in the stock market
To invest in the stock market, you must open an account with an investment company called a brokerage that is licensed to help you buy and sell securities. Although it used to be the case that you'd have to work with a financial professional to execute trades, today many firms offer online platforms that are completely self directed. If you're eager to get invested in the stock market but aren't sure where to start, check out our guide to where to open a trading account.
If you decide to invest on your own, keep in mind that individual stocks may perform better or worse than the market itself and can be very risky unless you hold a diversified range of them. To help reduce that risk, many investors choose to buy shares of mutual funds or exchange-traded funds (ETFs) that hold diversified mixes of hundreds of stocks already. This is intended to help you benefit from the returns of the stock market in a particular sector, industry and market overall without having to research and evaluate stock yourself.