How does the stock market work?

Companies are divvied up into shares

At its core, the stock market is comprised of businesses that are publicly traded. Instead of a company owned by an individual, family, or private group, a publicly traded company is divided up into shares, and anyone can own a stake.

Turn data into insights with Excel

Make better decisions backed by data and insights

Learn more

Buying shares means you own a stake

Owning a stock means you own a piece of the company. The stock market works as an auction house, and investors buy and sell shares in companies through the exchanges that make up the stock market. In America, the New York Stock Exchange (NYSE) and the Nasdaq are the major stock exchanges, both of which are regulated by the Securities and Exchange Commission (SEC).

Buyers and sellers set the price together

Buyers want the lowest price for a company’s share, while sellers want the highest. At the stock market, these two parties negotiate for the best price. Buyers place a bid, and the highest price they’re willing to pay is the “best bid.” Sellers place an ask, and the lowest price they’re willing to sell for is the “best ask.” When the trade is executed, the final price is somewhere in the middle.

Just like the overall economy, the stock market works on supply and demand: the more popular a company is, the higher its stock price becomes. This is why prices of stocks are always fluctuating, because of the number of investors currently interested in a company changes.

Fortunes can rise and fall

Investing always comes with the risk of losing money. If the stock market goes up, the economy is considered healthy, and consumers feel more confident about spending money. If prices of shares fall, there could be the chance of a looming recession, as the performance of the stock market can predict the state of the economy.

The stock market keeps things fair

The stock market offers democratic access to all who can afford to buy shares. By publicly listing the prices of shares, the stock market offers transparency and a fair price. The stock market also caters to all types, from long-term investors to traders who might exchange multiple stocks a day. Strict regulation from the SEC and other agencies also aims to level the playing field.

How to sell stocks and (hopefully) make a profit

Stockbrokers help people buy and sell stocks, no matter if they’re investment professionals or individuals. Online brokerage tools and apps make it even easier to get started. Once you’ve deposited funds into your preferred service, you can do the following:

• Research your stocks. Use fundamental analysis techniques to examine a company’s performance.
• Determine your investment style. Are you looking to invest long-term or quickly exchange stocks?
• Set price alerts. Brokerage tools have a feature to alert you to when a stock reaches a certain price.
• Buy low, sell high. Aim for the dip and remember that markets always rebound (and vice versa).

Stock market investing requires diligence and risk tolerance, but it is also an effective way to build long-term wealth. It can also be fun.