The stock market is an important part of the financial system, and one that affects many people. Understanding the basics of how it works can help you navigate its risks and rewards, and make informed decisions about your investments.
A stock market is a marketplace that brings together people who want to sell their shares in companies with those who want to buy them. Shares represent partial ownership of a company, and their value can rise or fall over time as the fortunes of the company and the economy change. People can invest directly in stocks by purchasing them from a brokerage firm, or through funds such as mutual funds and exchange-traded funds (ETFs).
Modern markets are complex and include online trading and electronic exchanges. These platforms connect buyers and sellers instantly. A buyer offers a bid price and a seller offers an ask price for a stock, and when the prices match up, the trade takes place. Market participants can also track the performance of a specific group of stocks through an index, such as the Dow Jones Industrial Average or the S&P 500.
The fundamental principles of supply and demand govern how a stock’s price changes. If demand for a stock is high, it will attract current shareholders to sell, driving up the price. But if investors lose faith in a particular company or the economy, it may become harder to find a buyer for the stock, driving its price down.