How the Stock Market Works

What is the stock market?

If you want to learn how the stock market works, start with this: the stock market is not one building or one company. It’s a network of exchanges and other trading venues where investors buy and sell shares of publicly traded companies. When you buy a share through your broker, you are almost always buying it from another investor, not from the company itself.

Prices change all day because people disagree about what a company is worth. Every trade needs a buyer who thinks the price is fair or cheap and a seller who is willing to let the shares go at that price. This lesson walks through the whole chain, from a company selling its first shares to your order being filled, and is the first step if you want to learn stock market trading from the ground up.

What is a stock?

A stock (also called a share or equity) is a unit of ownership in a company. If a company has 10 million shares outstanding and you own 1,000 of them, you own one ten-thousandth of the business. Shareholders usually get:

• A claim on the company’s profits. Some companies pay part of their profits out as dividends; others reinvest everything to grow.
• Voting rights on matters such as electing the board of directors (mainly for common stock).
• Limited liability. If the company fails, you can lose what you paid for the shares, but not more than that.

There are two main kinds. Common stock is what most people trade. Preferred stock usually pays a fixed dividend and gets paid before common stock if the company is liquidated, but typically carries limited or no voting rights.

Why companies issue shares: IPOs and the two markets

Companies sell shares to raise money for growth, research, paying down debt or letting early owners cash out, without taking on a loan they must repay. The first time a company sells shares to the public is its initial public offering (IPO). Investment banks (underwriters) help set the price and sell the shares, and the company files a registration statement with the SEC that discloses its business, finances and risks.

Almost all everyday trading happens in the secondary market. It matters to companies anyway: a liquid, fairly priced stock makes it easier to raise money later and to pay employees in shares.

Exchanges and how orders meet

The two best-known U.S. stock exchanges are the New York Stock Exchange (NYSE) and Nasdaq. Companies “list” their shares on one exchange, but the stock can be traded on many venues at once. Today nearly all matching is electronic, even on the NYSE, which still keeps a trading floor. See stocks and exchanges for more.

At any moment, a stock has two key prices:

• The bid: the highest price a buyer is currently willing to pay.
• The ask (or offer): the lowest price a seller is currently willing to accept.

The difference is the bid/ask spread. Heavily traded stocks often have spreads of a penny; thinly traded ones can have much wider spreads, which is a hidden cost every time you trade. Liquidity and bid/ask spreads covers this in depth.

Market makers are firms that continuously quote both a bid and an ask, standing ready to buy or sell. They earn the spread and help keep trading smooth when natural buyers and sellers don’t arrive at the same moment.

1. You place an order. For example, “buy 100 shares at the market” or “buy 100 shares, limit $20.00.” Order types explains the difference.
2. Your broker routes it. The broker sends the order to an exchange, another trading venue or a market maker. Brokers have a duty to seek the best execution reasonably available for customer orders.
3. The order is matched. A computer matching engine pairs buy and sell orders, generally by best price first and then by time. A market order takes the best available price; a limit order waits until someone meets your price.
4. You get a confirmation. The trade shows in your account within seconds, but ownership and cash formally change hands at settlement.
5. The trade settles. U.S. stock trades settle on T+1: one business day after the trade date.

What moves stock prices

In the short run, a stock’s price is set by supply and demand: when more people want to buy than sell at the current price, buyers have to pay up and the price rises; when sellers are more eager, it falls. What changes that balance?

• Earnings. Over time, stock prices tend to follow a company’s profits and expected profits. Quarterly earnings reports often cause large moves.
• Expectations. Prices reflect what investors expect. A company can report record profits and still fall if the results were below what the market had priced in.
• News. New products, lawsuits, management changes, mergers and analyst upgrades or downgrades all shift opinions.
• The economy. Growth, employment and inflation affect sales and profits across many companies at once.
• Interest rates. Higher rates make borrowing costlier and make bonds and savings more attractive compared with stocks, which can weigh on stock prices; lower rates tend to work the other way.
• Sentiment and the general market. Fear and optimism spread. Most stocks tend to move in the same direction as the overall market.

Traders who study price charts try to read this tug-of-war directly from price and volume: that’s the idea behind support and resistance and volume analysis.

Stock market indexes

When the news says “the market was up today,” it usually means an index rose. An index tracks a basket of stocks to show how a part of the market is doing.

You can’t buy an index directly, but index funds and exchange-traded funds (ETFs) aim to track them. Many traders watch the indexes to judge the general market’s direction before taking any single trade. Market capitalization explains how company size is measured.

Trading hours and settlement

Regular trading hours for U.S. stocks are 9:30 a.m. to 4:00 p.m. Eastern Time, Monday through Friday, except market holidays (and a few early-close days). Many brokers also offer:

• Pre-market trading before the open, and
• After-hours trading after the close.

Extended-hours sessions vary by broker. They usually have fewer participants, wider spreads and sharper price swings, and many brokers accept only limit orders then. See trading hours for the details.

When you buy a stock, the trade settles one business day later (T+1): that’s when the cash and shares officially change hands. A purchase on Monday settles Tuesday; one on Friday settles the following Monday, assuming no holiday. Settlement matters most in a cash account, where you generally need settled funds to pay for what you buy.

Who regulates the market and protects investors

Before opening an account, check the firm and its people on FINRA’s BrokerCheck and confirm SIPC membership. Choosing a broker covers what else to compare.

Investing vs. trading

People use the stock market in two broad ways:

• Investing means buying shares and holding them for years, aiming to benefit from a company’s long-term growth and dividends. Day-to-day swings matter less.
• Trading means holding for shorter periods, from minutes (day trading) to days or weeks (swing trading), aiming to profit from price moves. It requires more time, more decisions and strict risk management.

Neither approach removes risk, and past performance doesn’t guarantee future results. The lesson investing vs. trading compares them in detail, and getting started with trading covers the practical first steps. Unfamiliar words are in the glossary.

Frequently asked questions

How does the stock market work in simple terms?

Companies sell shares to raise money, and investors then buy and sell those shares with each other on exchanges. Prices rise when buyers are more eager than sellers and fall when sellers are more eager.

Who sets the price of a stock?

No single person does. The price is wherever the most recent buyer and seller agreed to trade, and it changes as investors update their views on the company, the economy and interest rates.

What are the stock market hours?

Regular U.S. trading hours are 9:30 a.m. to 4:00 p.m. Eastern Time on weekdays, except market holidays. Many brokers also offer pre-market and after-hours sessions, which are usually thinner and more volatile.

Is my money protected if my broker goes out of business?

If your broker is a SIPC member and customer assets are missing after it fails, SIPC protects up to $500,000 per customer, including up to $250,000 in cash. It does not protect against investments losing value.

What is the difference between the primary and secondary market?

In the primary market, such as an IPO, a company sells new shares and receives the money. In the secondary market, investors trade existing shares with each other, and the company receives nothing.

Sources and further reading

• Investor.gov (U.S. SEC): how stock markets work
• FINRA: investor education and BrokerCheck

Educational content only, not investment advice. Chart illustrations use made-up prices. Trading involves risk of loss. Disclaimer