The stock market is where people and institutions buy and sell pieces of companies

When you own a share of stock, you own a small part of a company. If a company issues 1,000 shares and you own 10 of them, you own 1 percent of that company. The stock market is the system and the physical or digital places where these shares change hands — where buyers and sellers meet and agree on a price.

The largest stock markets in the United States are the New York Stock Exchange (NYSE) and the NASDAQ. Both operate as electronic systems where orders to buy and sell are matched by computer. You do not go to a building and shout bids like in old movies. Instead, you place an order through a brokerage firm — a company licensed to buy and sell stocks on your behalf — and the order reaches the market in seconds.

Stock prices move based on what people think a company is worth right now and what they think it will be worth in the future. If a company reports strong earnings, the stock price often rises because more people want to own it. If a company announces layoffs or loses a major customer, the price often falls because fewer people want to own it. The price is simply the point where a buyer and a seller agree to trade.

Key Takeaways

  • A stock is a share of ownership in a company, and the stock market is where those shares are bought and sold through licensed brokers.
  • Stock prices change throughout each trading day based on supply and demand — how many people want to buy versus how many want to sell.
  • The New York Stock Exchange and NASDAQ are the two largest U.S. stock markets, and both operate electronically rather than as physical trading floors.
  • Companies issue stock to raise money for growth, and investors buy stock hoping the company will become more valuable over time.
  • You cannot buy stock directly from the market; you must use a brokerage firm, which charges a fee or commission for the transaction.

Why companies issue stock in the first place

A company issues stock when it needs money to grow but does not want to borrow it from a bank. If a company borrows from a bank, it has to pay interest and eventually repay the loan. If it issues stock instead, it raises money without taking on debt — but it gives up a piece of ownership to the people who buy that stock.

The first time a company sells stock to the public is called an Initial Public Offering, or IPO. Before an IPO, a company is private — only the founders, employees, and maybe some investors own pieces of it. After an IPO, anyone with a brokerage account can buy shares. The company gets the money from that first sale, and afterward, when shares trade between investors, the company does not receive that money — only the seller and buyer do.

How stock prices are set and what moves them

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 goes up. If many people want to sell and few want to buy, the price goes down. A stock can trade at different prices throughout a single day as new information arrives and people's opinions about the company change.

Several things move stock prices. Company earnings reports — the profit or loss a company announces every quarter — often cause big price swings. News about the industry, the economy, or the company's leadership can move prices. Sometimes prices move on rumors or expectations about what might happen in the future. A stock can also move because of broader market trends: if the overall market is falling, many stocks fall with it even if nothing changed about that particular company.

Individual investors do not usually move stock prices much. Large institutional investors — pension funds, mutual funds, insurance companies — move prices because they buy and sell in huge volumes. When a major fund decides to sell a stock, the volume of selling can push the price down quickly.

The difference between stocks and bonds

Stocks and bonds are both ways to invest money in a company, but they work very differently. When you buy a stock, you own a piece of the company. When you buy a bond, you are lending money to the company, and the company promises to pay you back with interest on a set schedule.

If a company does well, stock owners benefit because the stock price rises and they own a piece of the profits. If a company does poorly, stock owners lose money because the stock price falls. Bond owners, by contrast, get paid the same amount whether the company does well or poorly — as long as the company does not go bankrupt. If the company fails, bond owners get paid before stock owners do, which makes bonds less risky but also less rewarding when things go well.

How you actually buy and sell stock

You cannot walk into the stock market and buy a share directly. You need a brokerage account with a licensed firm. Common brokerages include Fidelity, Charles Schwab, E-Trade, and Robinhood. You open an account, deposit money, and then place orders to buy or sell stocks through their website or app.

When you place a buy order, you tell the brokerage how many shares you want and at what price you are willing to pay. The brokerage sends that order to the market. If someone is willing to sell at that price, the trade happens instantly. If no one is selling at your price, your order waits in a queue until someone does sell at that price or you cancel the order.

Most brokerages charge a commission or fee for each trade, though some offer commission-free trading for stocks. They make money other ways too — by lending out shares you own, by earning interest on cash in your account, or by offering premium services. When you sell a stock, you pay tax on any profit you made, and the brokerage will report that to the IRS.

What happens during market hours and after hours

The stock market operates on a schedule. The NYSE and NASDAQ are open Monday through Friday from 9:30 a.m. to 4:00 p.m. Eastern Time. This is called regular trading hours. During these hours, the volume of trading is high and prices move based on active buying and selling.

After 4:00 p.m., the regular market closes, but trading does not stop completely. Extended-hours trading, or after-hours trading, happens from 4:00 p.m. to 8:00 p.m. Eastern Time on most brokerages. Volume is much lower during after-hours trading, which means prices can move more dramatically on smaller trades, and it can be harder to buy or sell at the price you want. Most individual investors do not trade after hours.

The market is closed on weekends and on certain holidays — Thanksgiving, Christmas, Independence Day, and a few others. When the market is closed, no trading happens, so prices do not change. News that breaks over the weekend will affect prices when the market opens on Monday morning.

The role of stock indexes and what they measure

A stock index is a group of stocks chosen to represent the overall market or a part of it. The three most widely watched U.S. indexes are the S&P 500, the Dow Jones Industrial Average, and the NASDAQ Composite. Each index tracks the price movement of its stocks and produces a single number that tells you whether those stocks are up or down for the day.

The S&P 500 tracks 500 large U.S. companies and is often used as a measure of the overall health of the U.S. economy. The Dow Jones tracks 30 very large companies. The NASDAQ tracks stocks listed on the NASDAQ exchange, which includes many technology companies. When people say "the market is up" or "the market is down," they usually mean one of these indexes.

Indexes are useful because they let you see the big picture without tracking thousands of individual stocks. If you own a diversified portfolio — a mix of many different stocks — your returns will probably track fairly close to one of these indexes over time.

Frequently Asked Questions

Can I lose more money than I invested in stocks?

No. If you buy a stock for $100 and it falls to $0, you lose $100 — your entire investment. You cannot lose more than you put in because a stock price cannot go below zero. However, if you borrow money to buy stocks (called buying on margin), you can lose more than your initial investment because you owe the borrowed money back regardless of what happens to the stock.

What is the difference between a stock and a mutual fund?

A stock is a single company's share. A mutual fund is a collection of many stocks (or bonds, or both) bundled together and managed by a professional. When you buy a mutual fund, you own a piece of all the stocks in that fund. Mutual funds spread your risk across many companies, so one company's poor performance does not hurt you as much.

Do I have to watch the stock market every day?

No. Stock prices move constantly during trading hours, but most long-term investors do not check their accounts daily. Frequent trading usually costs more in fees and taxes and does not produce better results. Many investors check their portfolio once a month or once a quarter and make changes only when their situation changes.

What does it mean when a stock "splits"?

A stock split happens when a company divides each share into multiple shares. If a stock trading at $200 splits 2-for-1, each share becomes two shares worth $100 each. You now own twice as many shares, but your total investment value stays the same. Companies split stocks to make them cheaper and easier for individual investors to buy.

How do I know if a stock is a good investment?

There is no simple answer. Some investors study a company's earnings, debt, and competitive position. Others look at the stock's price history and try to spot patterns. Many investors simply buy a diversified index fund instead of picking individual stocks, which reduces the risk of choosing a bad one. Consider your goals, how long you plan to hold the stock, and how much risk you can handle.