What the stock market actually is

The stock market is a system where people and companies buy and sell pieces of ownership in businesses. When you buy a share of stock, you own a small part of that company. The price of a share moves up and down based on what buyers and sellers think the company is worth right now — not what it was worth yesterday or what it might be worth next year.

The stock market is not one building or one company. It is a network of exchanges — the largest being the New York Stock Exchange (NYSE) and the NASDAQ — where trades happen electronically. Brokers are the middlemen who execute the trades for you. You do not call the exchange yourself; you go through a broker, which can be a bank, an online platform like Fidelity or Charles Schwab, or a financial advisor.

Stock prices change constantly during trading hours because new information arrives constantly. If a company announces strong earnings, the price usually rises. If it announces layoffs or a lawsuit, the price usually falls. The price reflects what the market believes the company is worth at that exact moment.

Key Takeaways

  • A share of stock is a piece of ownership in a company, and the price moves based on what buyers and sellers think it is worth right now.
  • You buy and sell stock through a broker — an online platform, bank, or financial advisor — not directly from the exchange.
  • Stock prices change during trading hours because new information about the company or the economy arrives constantly.
  • The stock market opens at 9:30 a.m. and closes at 4 p.m. Eastern time on weekdays, and you can place orders outside those hours through after-hours trading.
  • Money flows into your account when you sell a stock for more than you paid for it, but you also lose money if you sell for less.

How prices are set and why they move

Stock prices are set by supply and demand, the same way the price of anything else is set. If many people want to buy a stock and few people want to sell it, the price rises. If many people want to sell and few want to buy, the price falls. There is no central authority deciding what a stock "should" cost; the price is whatever the last buyer and seller agreed on.

Prices move because new information changes what people think a company is worth. A company might announce earnings that beat or miss expectations. The Federal Reserve might raise interest rates, making bonds more attractive than stocks. A competitor might release a better product. A natural disaster might disrupt supply chains. A CEO might resign. Each of these events causes traders to reassess the value of a stock, and the price adjusts in seconds.

Some traders buy and sell the same stock many times in a single day, trying to profit from small price movements. Others buy a stock and hold it for years, betting that the company will grow and the price will rise over time. Both types of traders affect the price.

How you make or lose money

You make money in two ways: capital gains and dividends. A capital gain happens when you sell a stock for more than you paid for it. If you buy a share at $50 and sell it at $75, you have a $25 gain. If you sell at $40, you have a $25 loss. The money moves into your brokerage account, and you can withdraw it or use it to buy other stocks.

A dividend is a payment some companies make to shareholders, usually quarterly. The company decides to share some of its profits with the people who own it. Not all stocks pay dividends; growth companies often reinvest all profits back into the business. Dividend payments arrive in your account automatically if you own the stock on the payment date.

You lose money when the price of a stock falls below what you paid for it and you sell. You also lose money through fees — brokers may charge per trade, though many now offer commission-free trading. Some accounts charge annual fees. Over time, fees can eat into your returns, so compare brokers before you open an account.

Trading hours and how orders work

The regular stock market opens at 9:30 a.m. Eastern time and closes at 4 p.m. Eastern time, Monday through Friday. Most trading happens during these hours, and prices move fastest then because the most traders are active.

You can also trade outside regular hours through after-hours trading, which runs from 4 p.m. to 8 p.m. Eastern time. Fewer traders are active after hours, so prices can move more dramatically and spreads — the difference between the buy price and sell price — are wider. Some brokers do not offer after-hours trading, so check your platform.

When you place an order, you choose an order type. A market order buys or sells immediately at the current price. A limit order buys or sells only if the price reaches a number you set. If you place a limit order to buy at $50 and the stock is currently $55, your order waits until the price drops to $50 or below. If the price never reaches $50, your order never fills.

Who participates in the stock market

Individual investors — people like you — buy and sell stocks through brokers. Institutional investors — pension funds, mutual funds, hedge funds, insurance companies — buy and sell in much larger volumes and often move prices more than individuals do. Market makers are firms that buy and sell constantly to provide liquidity, meaning there is usually someone willing to buy or sell at any moment.

Companies themselves participate by buying back their own stock, which reduces the number of shares outstanding and can push the price up. Insiders — executives and board members — can buy and sell their company's stock, but they must report these trades publicly and follow strict rules to prevent them from trading on secret information.

The Securities and Exchange Commission (SEC) oversees the stock market and enforces rules against fraud and insider trading. Brokers are regulated and must keep your cash and stocks separate from their own money. If a broker fails, your account is protected up to $500,000 by the Securities Investor Protection Corporation (SIPC).

The difference between stocks and other investments

Stocks represent ownership in a company. Bonds represent a loan you make to a company or government; you get paid interest and your money back on a set date. Bonds are generally less risky than stocks but also pay less over time. Mutual funds and exchange-traded funds (ETFs) are baskets of many stocks or bonds managed by a professional or tracked to an index. They spread your risk across many companies instead of betting on one.

Stock prices can swing wildly in a single day. Bond prices move more slowly. Mutual funds and ETFs move at the speed of their underlying holdings. If you cannot tolerate seeing your money drop 20 percent in a month, stocks alone may not be right for you. Most financial advisors recommend a mix of stocks, bonds, and other investments based on your age, goals, and how much risk you can handle.

How the stock market connects to the broader economy

The stock market is not the economy, but it reflects what investors think about the economy's future. When the market rises, investors are optimistic about corporate profits and economic growth. When it falls sharply, investors are worried about recession, inflation, or other threats. A market crash does not cause a recession, but it can signal that one is coming.

Interest rates set by the Federal Reserve affect stock prices. When rates rise, bonds become more attractive, and some money flows out of stocks into bonds. When rates fall, stocks become more attractive. Inflation erodes the value of future profits, so high inflation usually pushes stock prices down. Unemployment, consumer spending, and corporate earnings all influence how investors value stocks.

Individual stocks can rise while the overall market falls, and vice versa. A company might announce a breakthrough product while the broader economy slows. The stock market is made up of millions of individual decisions, and those decisions do not always move in the same direction.

Frequently Asked Questions

Can I lose more money than I invested in a stock?

If you buy a stock outright, the worst that can happen is the company goes bankrupt and the stock becomes worthless. You lose what you invested, but not more. However, if you borrow money to buy stocks — called buying on margin — you can lose more than your initial investment because you owe the broker back the borrowed money plus interest.

Why do stock prices move so fast?

Prices move fast because traders react instantly to new information. Computers now execute trades in milliseconds. If a company announces earnings, thousands of traders reassess the stock's value and place orders within seconds. The faster the information spreads, the faster the price adjusts.

Do I have to watch the market every day?

No. If you buy stocks and hold them for years, daily price movements do not matter much. Your money is tied up in the company's long-term growth. Day traders watch constantly and try to profit from small moves. Most individual investors do better by buying and holding, not checking prices every hour.

What happens if a company I own stock in gets bought by another company?

The acquiring company usually offers to buy your shares at a set price, often higher than the current market price. You can accept the offer and receive cash, or in some cases receive shares of the acquiring company instead. The deal is announced in advance, so you have time to decide.

Is the stock market rigged against individual investors?

Institutional investors have advantages — lower fees, faster information, better research — but individual investors can still build wealth through stocks over time. The market is regulated to prevent outright fraud. Your best protection is to understand what you are buying, diversify across many stocks or funds, and not try to time the market by buying and selling constantly.