If you want to know how the stock market works, the good news is that the core idea is simple. It is a place where buyers and sellers meet. Everything else is detail on top of that.
This chapter is general US information, not advice.
What a stock is
A stock is a small piece of ownership in a company. One piece is called a share. If a company has 1,000,000 shares and you own 1,000 of them, you own one tenth of one percent of the business.
Companies sell shares to raise money. They use it to build, hire and grow. In return, people who buy shares become part owners. They share in the good times and the bad.
How the stock market works: the basics
The stock market is not one building. It is a network of exchanges, which are organized marketplaces. In the US, the two big ones are the New York Stock Exchange and Nasdaq. Today almost all trading is on computers.
You do not walk onto an exchange yourself. You use a broker, a company that sends your order in for you. Chapter 4 shows how to pick one and open an account.
Why prices move
A stock price is set by supply and demand. If more people want to buy than sell, the price tends to rise. If more want to sell than buy, it tends to fall.
People want to buy or sell for many reasons.
- News about the company, such as earnings, which are its profits.
- Changes in the wider economy, such as interest rates.
- Mood. Fear and excitement push prices more than most people expect.
Nobody can tell you where a price goes next.
Price is not the same as value
A $300 share is not “bigger” than a $10 share. The price per share alone tells you little. What counts is how much the whole company is worth, and what you pay compared to what the business earns. Chapter 5 teaches this.
Market size in one number
Here is a worked example. Say a company has 1,000,000 shares and each trades at $20. Multiply them and you get $20,000,000. That is its market capitalization, or market cap. It is the market’s current price tag on the whole company.
If the price moves to $22, the market cap becomes $22,000,000. The business did not change overnight. People’s view of it did.
Pick any well known company you use in daily life. Look up its stock price and number of shares on a free finance site, then multiply to find its market cap. You are not buying anything. You are just practicing how to read the numbers.
How a trade actually happens
When you place an order, two prices matter. The bid is the highest price a buyer will pay right now. The ask is the lowest price a seller will accept. The gap between them is the spread.
Say the bid is $19.98 and the ask is $20.02. The spread is $0.04. If you bought 100 shares at the ask, you would pay $2,002. If you sold them right back at the bid, you would get $1,998. The $4 difference is a small cost of trading.
For big, popular stocks the spread is usually tiny. For small or rarely traded ones, it can be wider.
Two kinds of orders
- A market order buys or sells right away at the best price available.
- A limit order sets the price you are willing to accept. It only goes through if the market reaches that price.
Limit orders give you more control. Market orders give you speed.
When the market is open
The main US session runs from 9:30 a.m. to 4 p.m. Eastern time, Monday to Friday. It is closed on certain holidays. Some brokers allow trading outside those hours, but prices can swing more.
Why the market goes up and down
Over long periods, the US market has risen, as companies grow and earn more. Along the way there have been sharp falls too. A fall of 10% or more is called a correction. A fall of 20% or more is often called a bear market. A long rise is called a bull market.
These swings are normal. They are part of how the market works. They feel scary, especially at first. Knowing they happen can make them easier to sit through. This is general history and not a promise of what comes next.
How you can make money, and lose it
There are two main ways a stock can pay you.
- Price growth. You sell for more than you paid.
- Dividends. Some companies share part of their profit with owners in cash. Chapter 8 covers these.
The risk is that the price falls and stays down. If you sell then, you lock in a loss. That is why time and patience matter so much, and why we spread money across many holdings.
Who else is in the market
You trade alongside big professional firms. You do not have to beat them. Many everyday investors keep costs low, spread money out and hold for the long run.
To look up any word from this chapter, use the glossary. To see the ideas in action without risking money, try the games. The free starter guide also has a one page summary. For a quick way to check a stock’s price against its earnings, there is a P/E ratio calculator, and the Stockvert tool helps with conversions.
- A stock is a share of ownership in a company, and the market is where buyers and sellers meet.
- Prices move with supply and demand, which come from news, the economy and mood.
- Market cap is share price times number of shares, and it shows what the whole company is priced at.
- The bid, ask and spread are the small costs and mechanics behind every trade.
- Ups and downs are normal, and nobody can predict them reliably.
Common questions
Do I need to watch the market every day?
No. Checking constantly often leads to worry and rushed choices. Many long term investors look only now and then.
Who decides what a stock is worth?
Everyone does, together. Each trade is a buyer and a seller agreeing on a price at that moment.
Can the stock market close or go to zero?
Single companies can fail and their shares can lose most or all value. The whole market falling to zero is extremely unlikely, but large drops have happened. This is why spreading your money out matters.
Now you have a clear picture of how the stock market works: owners, buyers, sellers and prices that shift with demand. Next, we look at the three building blocks you will meet again and again.
Previous: Chapter 1: Why Start Investing, Even Small | Next: Chapter 3: Stocks, Bonds and Funds: The Three Building Blocks
Positive Stocks is for education only. It is not investment advice. Investing involves risk, including loss of money. Do your own research and speak with a licensed professional.
