What Is The Stock Market? How Does It Work? (2024)

The stock market is a constellation of marketplaces where securities like stocks and bonds are bought and sold. Stock markets provide you with easy, transparent access to investment assets, and they help professional investors determine fair prices for public companies.

What Is the Stock Market?

Think of the stock market as the main financial venue where investing happens. It’s a collection of all the places where matches are made between buyers and sellers trading shares of public companies.

“The stock market” and “Wall Street” can refer to the entire world of securities trading—including stock exchanges where the shares of public companies are listed for sale and markets where other securities are traded. TheNew York Stock Exchangeis the biggest stock market on earth.

Market indexes like the and the Dow Jones Industrial Average aggregate the prices of groups of stocks, which indicate the day-to-day performance of the stock market as a whole.

How Does the Stock Market Work?

The stock market helps companies raise money to fund operations by selling shares of stock, and it creates and sustains wealth for individual investors.

Companies raise money on the stock market by selling ownership stakes to investors. These equity stakes are known as shares of stock. By listing shares for sale on the stock exchanges that make up the stock market, companies get access to the capital they need to operate and expand their businesses without having to take on debt. In exchange for the privilege of selling stock to the public, companies are required to disclose information and give shareholders a say in how their businesses are run.

Investors benefit by exchanging their money for shares on the stock market. As companies put that money to work growing and expanding their businesses, investors reap the benefits as their shares of stock become more valuable over time, leading to capital gains. In addition, companies pay dividends to their shareholders as their profits grow.

The performances of individual stocks vary widely over time, but taken as a whole the stock market has historically rewarded investors with average annual returns of around 10%, making it one of the most reliable ways of growing your money.

Who Regulates the Stock Market?

The Securities and Exchange Commission (SEC) regulates the stock market in the U.S. The SEC was created after the passing of the Securities Act of 1933, following the stock market crash of October 1929. SEC regulations cover four main areas:

• Stock exchanges
• Brokers and dealers
• Financial advisors
• Mutual funds

The SEC’s mission is to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation. Thanks to SEC rules, companies that publicly trade on the stock market must tell the truth about their business, and those who sell and trade securities must treat investors fairly and with honesty.

Stock Market vs Stock Exchange

Although the terms are used interchangeably, the stock market is not the same as a stock exchange. Think of a stock exchange as a part of a whole—the stock market comprises many stock exchanges, such as the Nasdaq or New York Stock Exchange in the U.S.

When people talk about how the stock market is performing, they mean the thousands of public companies listed on multiple stock exchanges. And more generally, the stock market can be thought of as encompassing a very broad universe of bonds, mutual funds, exchange-traded funds and other securities beyond just stocks.

What Is a Stock Market Index?

A stock market index tracks the performance of a group of stocks that represents a particular industry or segment of the stock market, like the technology, energy and transportation sectors.

Often, one of three large indexes is used as shorthand to describe the performance of the U.S. stock market as a whole:

• Dow Jones Industrial Average. The DJIA is made up of 30 blue-chip stocks of U.S. industrial companies.
• S&P 500. The S&P 500 represents 500 of the largest companies in the U.S. economy.
• The Nasdaq Composite. The Nasdaq Composite tracks the performance of more than 3,000 stocks listed on the Nasdaq stock exchange.

Other Types of Markets

The stock market generally refers to markets and exchanges where equity shares and related securities are traded. Other types of financial assets have their own markets.

• Over-the-Counter Markets. OTC markets provide a venue for trading that takes place outside of major exchanges. OTC trades are primarily made directly between sellers and buyers, and prices may or may not be publicly available. Most bonds are traded OTC, and many stocks—including penny stocks—are also traded over-the-counter.
• Commodities Markets. Raw materials like steel, coal and oil are traded on commodities markets. There are around 50 major commodity markets worldwide that facilitate trade in a wide range of commodities.
• Derivatives. Derivatives are financial contracts like options whose value is tied to an underlying asset. These are essentially contractual bets about whether individual securities’ values will rise or fall. For experienced investors, derivatives can be extremely lucrative ways to hedge their bets when investing, and they can be incredibly risky for beginners.
• Foreign Exchange Markets. Forex trading is a borderless, international market for exchanging currencies. Forex traders take advantage of the constantly fluctuating value of different currencies to make profits, and help provide liquidity for international trade.
• Cryptocurrency. Bitcoin,Ethereum and other cryptocurrencies are traded on specialized crypto exchanges.

How to Invest in the Stock Market

If you want to invest in the stock market, the process to get started is easier than you think:

1. Decide what kind of account you want to open. From retirement savings to college savings, from short-term goals to long, there really is an investment account for everything.
2. Open a brokerage account. Once you’ve decided what kind of account you want, you’re ready to open an account at a provider called a brokerage. When choosing a company, consider their fees and available investment options.
3. Deposit money. To get started, you need to make an initial deposit. You can also set up recurring deposits to automate your investments going forward.
4. Choose your investments. Once your account is open, you can buy and sell securities. You can opt for individual stocks and bonds or mutual funds, index funds and exchange-traded funds (ETFs) that contain hundreds of individual securities. Many experts recommend a diversified, fund-based approach to minimize the risk any one bad investment loses you money.
5. Purchase your investments. Once you’ve settled on what you want to buy, simply enter the ticker symbol in the buy field and indicate how many shares you want to buy.

Stock Market FAQs