How Does the Stock Market Work
Last updated: March 31, 2026
Quick Answer: The stock market is where shares of public companies are bought and sold. Companies sell shares to raise money; investors buy hoping value increases. Prices are set by supply and demand.
Key Facts
- NYSE is the largest exchange ($25+ trillion market cap)
- S&P 500 averages ~10% annual return historically
- Most trading is electronic, executing in microseconds
- IPO = Initial Public Offering, when a company first sells shares publicly
- An index fund owns all stocks in an index like the S&P 500
The Basics
When you buy a share of Apple, you own a tiny fraction of the company. If Apple grows, your share becomes more valuable.
How Companies Get Listed
Through an IPO. Investment banks set an initial price. Once listed, anyone can trade shares on the exchange.
How Prices Move
Supply and demand. Positive earnings → more buyers → price rises. Bad news → more sellers → price falls.
Key Concepts
- Bull market: Prices rising
- Bear market: Decline of 20%+
- Index: Basket of stocks (S&P 500 = 500 largest US companies)
- Dividends: Company shares profits with shareholders
- Market cap: Price × shares outstanding
How to Invest
Open a brokerage account. For beginners, index funds are recommended over individual stocks. Dollar-cost averaging reduces timing risk.
Related Questions
What is an index fund?
A fund that buys all stocks in a market index (like S&P 500). Lower fees than actively managed funds and historically outperforms most of them.
Sources
- Wikipedia — Stock Market CC-BY-SA-4.0
- SEC — Investor.gov public_domain