The stock market—where buyers and sellers can trade shares of public companies—is one of several different types of financial market. Other types include the bond market, the commodities market, the foreign exchange market, and the cryptocurrency market. Over time, the stock market has offered one of the most powerful opportunities for investors to grow wealth. Entire books are dedicated to explaining how the stock market works, but if you’re here for the basics, we’ve got you covered.
What is the stock market?
Put simply, the stock market is the network of exchanges, trading venues, and marketplaces where investors buy and sell stocks. In the US stock market, this includes stock exchanges, like the New York Stock Exchange (NYSE) and the Nasdaq, the organized marketplaces that facilitate the trading people do within their investment accounts, as well as "over-the-counter" markets, where securities are traded outside of a formal stock exchange. The terms "stock market" and "stock exchange" are sometimes used interchangeably. However, the stock market is the trading network made up of all the individual stock exchanges and other market centers in which people actually do their trading. Today, most stock exchanges and marketplaces are entirely digital networks.
When people and the media discuss stock market performance, 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 these indexes track many of the largest publicly traded companies in the US, they're often used as indicators of broader stock market performance.
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 who want to resell shares they previously bought. As a group, stock market participants come together to create what's called "market liquidity," enabling individual investors to trade stocks for cash at transparent prices.
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 supply 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 lowest amount the seller is willing to accept for their stock.
- The bid is the highest price the buyer is willing to pay.
The difference between the ask and the bid is known as the bid–ask spread. A trade can occur when a buyer is willing to pay a seller’s asking price, or a seller is willing to accept a buyer’s bid.
When trading, instead of setting a specific bid or ask, you can buy or sell with a market order. Market orders seek to buy or sell immediately at the best available price. A buy order will generally execute at or near the current ask and a sell order at or near the current bid, but the actual execution price is not guaranteed. 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 try to control the price you buy or sell at using a stop order, a limit order, or another more sophisticated order type.
Why do people participate in the stock market?
Investors regard the stock market as an opportunity to potentially grow wealth over time. Historically, the S&P 500 has returned on average about 10% annually. Keep in mind that returns can vary significantly from year to year, and in many years, market indexes have gone down.1 That kind of growth can not only help to 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 stable and 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) oversees the securities markets, while the Financial Industry Regulatory Authority (FINRA) regulates brokerage firms and financial professionals that are FINRA members. These regulators 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 assisting with your accounts or trades are well-informed.
Stock market hours
Major US stock exchanges, like the NYSE and Nasdaq, typically keep stock market hours of 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 a brokerage firm, a type of financial institution 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 brokerage 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. 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 stocks yourself.