How Does the Stock Market Work? A Beginner’s Guide
For noninvestors or those just getting started, the stock market can seem complex — and it is, the more you become involved with it. But the concept of the stock market itself is relatively easy to understand. How does the stock market work? Well, to explain it, we can turn to some very simple examples.
Here’s a look at how the stock market works in simple terms. Keep in mind, these are just the basics! The market is a complex mechanism of the economy, and there are incalculable factors that affect it. We’re going to look at it in a vacuum.
How the Market Works
The stock market is a forum where companies come to offer shares and where investors come to buy and sell those shares. The stock market “opens” every weekday at 9:30 a.m. and closes at 4 p.m, (ET) except for national holidays. It’s not a physical place, and you can’t buy or sell through the stock market until the day has started. Although some brokers allow you to place trades outside of open hours.
Throughout the day, stock prices will rise and fall based on timely news about each company. If Company A launches a successful product, the stock will likely climb. If the CEO of Company B gets convicted of a crime, the stock will likely plummet. Throughout the day, people will buy and sell shares of companies based on the news, which dictates how much the stock rises or falls. It’s the perfect model of supply and demand.
The beauty of the stock market is that there are thousands of companies to choose from! Investors can buy shares of any companies they believe in, across numerous sectors, such as consumer goods, tech and banking. As you buy positions in companies, your personal portfolio grows and shrinks based on the cumulative performance of every company you invest in.
The Basics of Investing
How does stock market investing work? It all revolves around buying a stake in a company — called opening a position — to profit from their growth and success.
To get listed on the stock market, new companies launch an initial public offering, selling shares of their business to public investors. Those who invest give their money to the company and receive shares in return, which equate to a stake of the profits that company generates. As the company grows and becomes more profitable, share price rises. If the business does poorly, share price falls. The idea is to sell shares for more than you buy them for.
How does the stock market work for beginners? The same way it works for tenured investors! Everyone is on a level playing field when it comes to buying and selling shares. It doesn’t matter if you have $100 or $1 billion — if you can afford the share price, you can buy a position!
People want to buy shares of companies they think will grow and become more profitable. If they buy shares and the company does well, the value of their shares increases. Likewise, they might sell their shares of a company for any number of reasons. Maybe the company has done extremely well and they want to cash out their profits, turning their shares into real cash. Or maybe they think the company is in for rough times and want to sell their shares before their value decreases.
Whether buying or selling, there are two sides to the transaction. Companies sell shares to investors. Investors might buy shares from other investors. Sometimes, the company even buys back shares from investors! Supply and demand: Someone sells and someone buys.
The Market Is Always Changing
Remember, there are millions of people investing in the stock market, with billions of transactions occurring daily. Even when there’s no news, good or bad, about a company, the stock price will rise or fall based on how people interact with it.
Again, this is all a very basic explanation of how the stock market works, from a beginner’s perspective. There’s a lot of lingo to learn and plenty of strategies out there for different investing mindsets. The best way to learn more is to get investing! Oh, and to sign up for our free daily e-letter, where you’ll get all the best stock-investing tips, insight and analysis from top stock market experts. Daily.