The Stock Market Explained

Close up of the stocks section in the newspaper
Markus Spiske


Stocks and the stock market. Every day, we see and hear news about it; every other day, you see some story about how investing in the market is the key to saving money and building wealth. But you don’t know the first thing about getting started.

This quick stock market guide will help you make sense of the Wall Street mystery.

What Is the Stock Market?

In its simplest form, the stock market is a system of buying, selling, and trading stocks.

But what are stocks?

Public corporations offer small shares of their businesses. Every share is called a stock. When you buy stock in Target, Starbucks, or any other company, you own a piece of that business. The stock price of every corporation is different since pricing is based on company earnings.

You’ve probably heard of the Dow Jones Industrial Average or S&P 500. These are stock market indexes that track the performance of numerous stocks considered representative of the entire market.

How Does the Stock Market Work?

When a business wants to list shares of its stock on the stock market, it does so through an initial public offering (IPO). Once the company’s stock is listed on an exchange like Nasdaq or the New York Stock Exchange (NYSE), interested investors purchase shares. This helps the company raise money to grow business even more.

Investors then buy, sell, and trade the stocks among themselves. The Nasdaq or NYSE tracks the supply and demand of each listed stock. Computer algorithms play a central role in the stock market by calculating supply, demand, and the prices investors and traders should use to buy and sell.

In the past, this complex buy-sell-trade process always occurred in a physical marketplace or exchange, like the one depicted in The Wolf of Wall Street. However, the internet has transformed the stock market by shifting most of the process to the internet and online stockbrokers.

How Should I Get Started Investing in the Stock Market?

You don’t need to be wealthy to get started in the stock market. In fact, you might be invested in the stock market already, without even knowing it! Do you have a 401(k) plan at work, for example? It’s probably invested in mutual funds, which are composed of stocks from many different companies. Many people prefer to use mutual funds to delve into the stock market since the fund’s managers make the investment decisions for you. Also, the fact that mutual funds own a variety of stocks are diversified, as the pros say makes them lower-risk.

Do-It-Yourself Investing

If you’re eager to be more hands-on, you can purchase individual stocks too. You have to do it through a stockbroker or brokerage firm that acts as the middleman between you and the stock exchange, doing the actual buying and holding the stocks for you in an account. You can go to an actual bricks-and-mortar firm, like Merrill Lynch or Charles Schwab, or opt for an on-line one, like E-Trade, Ally Invest, and TD Ameritrade.

Just keep in mind that stocks do carry more risks than other investments. Stocks can be volatile: that is, they experience sudden dips in price that may cause you to lose money in the short term. However, history shows that stocks collectively increase in value over time. Of course, the more diversified your portfolio of stocks is, the less risk it carries.

You don’t need to buy, sell, and trade your stocks frequently to make a profit. In fact, a “buy and hold” strategy is recommended for most individual investors, though of course, you should act when you see a great opportunity. Financial planners, brokers, and money managers can help you through the process, watching the market for you and advising you when to make a move.

Read about micro-investing and how to get started with our complete guide: Micro-Investing: What It Is, Why It’s for You and How to Start.