The stock market is where shares of companies are bought and sold between investors

The stock market is a system for trading ownership pieces of companies. When you buy a share of stock, you own a small part of that company. The price of a share changes based on what other investors think the company is worth — if many people want to buy, the price goes up; if many want to sell, it goes down. The two largest stock markets in the United States are the New York Stock Exchange (NYSE) and the NASDAQ.

Most individual investors do not buy stocks directly on the exchange floor. Instead, they use a brokerage account — an account held at a financial company that lets you place buy and sell orders. The brokerage executes the trade on your behalf and holds your shares. You pay a commission or fee to the brokerage for this service, though many brokerages now charge zero commission per trade.

Stock prices move constantly during trading hours (9:30 a.m. to 4:00 p.m. Eastern time on weekdays). You can place an order to buy or sell at any time during those hours, and the order executes at the current market price or at a price you specify in advance. After the market closes, you cannot trade until the next trading day begins.

Key Takeaways

  • A share of stock represents partial ownership in a company, and its price changes based on investor demand and company performance.
  • You need a brokerage account to buy stocks, and most brokerages now charge no commission per trade.
  • Stock prices move during market hours (9:30 a.m. to 4:00 p.m. Eastern time on weekdays), and you can place orders to buy or sell at any time.
  • Stocks carry risk — you can lose money if the company performs poorly or if you sell when the price has dropped.
  • Diversification — owning many different stocks or funds — reduces the risk that any single company's failure will harm your overall investment.

How you make or lose money on stocks

You make money on a stock in two ways: capital gains and dividends. A capital gain happens when you sell a share for more than you paid for it. If you buy a share at $50 and sell it at $70, you have a $20 capital gain. A dividend is a payment some companies make to shareholders from their profits — usually a small amount per share, paid quarterly or annually. Not all companies pay dividends; growth-focused companies often reinvest profits into the business instead.

You lose money when the price falls below what you paid. If you buy at $50 and the price drops to $30, you have a paper loss of $20 per share. The loss becomes real only when you sell — if you hold the stock, the price may recover. This is why timing matters: selling during a market downturn locks in losses, while holding through downturns and selling during recoveries can preserve or grow your money.

The stock market as a whole has historically risen over decades, but it moves in cycles. Periods of rapid growth (bull markets) are followed by periods of decline (bear markets). Individual stocks can rise or fall regardless of the overall market direction. A company might perform poorly even when the market is strong, or a strong company might hold its value during a market decline.

Risk and how to reduce it

Stocks are riskier than bonds or savings accounts because their prices are unpredictable in the short term. A company's stock can drop 20, 30, or 50 percent in weeks or months based on news, earnings reports, or broader economic shifts. If you need the money soon, a sudden drop can force you to sell at a loss. If you can wait years for recovery, you have time to ride out the decline.

The most common way to reduce risk is diversification — spreading your money across many different stocks instead of putting it all in one. If one company fails, you lose only a small portion of your total investment. Many investors use mutual funds or exchange-traded funds (ETFs) to diversify automatically. A single mutual fund or ETF holds dozens or hundreds of stocks, so you own a piece of many companies with one purchase.

Your age and timeline matter. If you are young and will not need the money for 30 years, you can afford to hold stocks through multiple market downturns because you have time to recover. If you are near retirement and need the money within five years, stocks are riskier because you may be forced to sell during a downturn. Many investors shift toward bonds and cash as they age.

How to open a brokerage account and buy your first stock

To buy stocks, you need a brokerage account. Major brokerages include Fidelity, Charles Schwab, E*TRADE, TD Ameritrade, and Robinhood. Most allow you to open an account online in 10 to 15 minutes. You will need to provide your name, address, Social Security number, and employment information. The brokerage will verify your identity and run a background check.

After your account is open, you transfer money into it from your bank account. This usually takes one to three business days. Once the money is in your brokerage account, you can place an order to buy stocks. You search for the company by name or ticker symbol (a short code like AAPL for Apple or MSFT for Microsoft), choose how many shares you want, and place the order. The trade executes at the current market price, and the shares appear in your account immediately.

You can also set up automatic investments — many brokerages let you transfer a fixed amount from your bank account each month and automatically buy stocks or funds. This approach, called dollar-cost averaging, removes the pressure to time the market perfectly and can reduce the impact of price swings.

Taxes on stock gains and losses

When you sell a stock for a profit, you owe federal income tax on the gain. The tax rate depends on how long you held the stock. If you held it for less than one year, the gain is taxed as ordinary income at your regular tax rate (up to 37 percent federally). If you held it for more than one year, the gain is taxed at the long-term capital gains rate, which is lower — 0, 15, or 20 percent depending on your income level.

If you sell a stock for a loss, you can use that loss to offset gains from other stocks or other income. You can deduct up to $3,000 in net losses against ordinary income in a single year; any excess carries forward to future years. This is called tax-loss harvesting, and it can reduce your overall tax bill.

Dividends are also taxed. may have access to dividends (from most U.S. companies) are taxed at the long-term capital gains rate. Non-may have access to dividends are taxed as ordinary income. You owe tax on dividends in the year you receive them, even if you reinvest them into more shares.

Common mistakes new investors make

Trying to time the market — buying low and selling high — is extremely difficult even for professionals. Most new investors buy when prices are high and excitement is greatest, then sell when prices fall and fear takes over. This locks in losses. A better approach is to invest regularly regardless of price and hold for years.

Putting too much money into a single stock or sector is another common mistake. If that company or industry struggles, your entire portfolio suffers. Beginners often do better starting with broad index funds that own hundreds of companies rather than picking individual stocks.

Ignoring fees and commissions can also hurt returns over time. Even small annual fees compound — a 1 percent annual fee on a $10,000 investment costs you roughly $100 per year, and that money cannot grow. Compare fee structures across brokerages and funds before you invest.

Finally, many new investors panic during market downturns and sell everything. Markets have always recovered from downturns historically, but only if you stay invested. Selling during a crash and sitting in cash means you miss the recovery.

Stock market indexes and how they work

A stock market index is a measurement of a group of stocks meant to represent the overall market or a sector of it. The three most widely followed U.S. indexes are the S&P 500 (500 large U.S. companies), the Dow Jones Industrial Average (30 large U.S. companies), and the NASDAQ Composite (mostly technology companies). When news reports say "the market is up," they usually mean one of these indexes has risen.

Indexes are weighted, meaning larger companies have more influence on the index's movement. The S&P 500 is weighted by market capitalization — Apple, Microsoft, and other huge companies move the index more than smaller companies do. This means the index can rise even if most individual stocks in it fall, because the largest companies are rising.

Many investors track their own portfolio's performance against an index. If you own a diversified mix of U.S. stocks, your returns should roughly match the S&P 500 over time (minus fees). If you consistently underperform the index, you may be paying too much in fees or making poor stock picks.

Frequently Asked Questions

Can I lose more money than I invested in stocks?

No, not with regular stock purchases. The worst case is that the stock price falls to zero and you lose your entire investment. With options or margin accounts (borrowed money), you can lose more than you invested, but these are advanced strategies for experienced investors.

How much money do I need to start investing in stocks?

Most brokerages have no minimum account balance. You can open an account with $1 and buy fractional shares (portions of a share) at many brokerages. However, if you are paying per-trade commissions, small investments get eaten up by fees. With zero-commission brokerages, you can start with any amount.

Is the stock market rigged against individual investors?

Individual investors have disadvantages compared to large institutions — less information, slower execution, and higher fees — but the market is not rigged. Millions of individuals make money in stocks over time. The key is diversifying, holding for years, and avoiding emotional decisions during downturns.

Should I invest in individual stocks or funds?

Most beginners do better with funds (mutual funds or ETFs) because they diversify automatically and require less research. Individual stocks offer more control and potential for higher returns, but they require more knowledge and carry higher risk. Many investors use both — a core holding in broad index funds plus some individual stocks.

What happens to my stocks if the brokerage goes out of business?

Your stocks are protected. Brokerages are required to hold your shares separately from their own assets. If a brokerage fails, your shares transfer to another brokerage. Cash in your account is insured up to $250,000 by the Securities Investor Protection Corporation (SIPC).