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How the Stock Market Works


How the Stock Market Works

The stock market isn't just one place; it's many stock exchanges worldwide where people trade shares of public companies. Share prices change a lot because of how much people want to buy or sell them.

A share of stock is a small piece of a company that anyone can own. The price of the stock mostly shows what investors and experts think the company will earn in the future.

People who think a company will do great push the price higher, while those who think it'll do badly bring the price down. Sellers aim to get more for each share than they paid, hoping to make a profit. Buyers want the lowest price to sell later and make money.

Where Is the Stock Market?

The United States has two really big stock exchanges: the Nasdaq and the New York Stock Exchange (NYSE). Together, they're worth a lot of money, like trillions of dollars. This shows the total value of all the shares on these exchanges. By the end of 2018, the NYSE was valued at around ₹28.5 trillion, and by the end of 2019, the Nasdaq was valued at about ₹9.8 trillion.

Both exchanges connect people who want to buy and sell stocks, but they use different methods to do it.

  • On the Nasdaq, investors don't directly trade with each other. Instead, their trades are managed through a dealer in the market.
  • At the NYSE, prices are determined through an auction process. Before the market opens at 9:30 a.m. on weekdays, investors place their orders to buy or sell stocks. These orders are matched up, connecting the highest bid price with the lowest asking price. Trading keeps happening until 3:50 p.m. as more orders come in.

The financial markets in the U.S. are advanced, making it simple to get information about companies. This transparency builds trust among global investors, drawing more of them to the U.S. stock market. This popularity makes it easier for American companies to become publicly traded.

What Is a Stock Market Index?

The U.S. stock market's progress is watched over time through three main indices: the Dow Jones Industrial Average (DJIA) for top 30 U.S. companies, the S&P 500 for 500 big U.S. companies, and the Nasdaq. Various parts of the market have their own indices too, like the Russell 2000 for 2,000 small companies.

Other countries also have their stock markets and indices. The five largest are London, Tokyo, Shanghai, Hong Kong, and Euronext exchanges. Each exchange has its own index, while global indices track how stocks perform across different countries. For instance, the MSCI Index monitors stocks in emerging markets such as China, India, and Brazil.

Why Invest in the Stock Market?

The stock market helps the U.S. economy grow. When people believe the economy is doing well, they invest in stocks because strong economies help companies earn more money. Companies use the stock market to get money and grow their businesses. So, investing in the stock market is like investing in the economy's growth.

Newer companies sell their shares for the first time in what's called an IPO on big exchanges like the NYSE or Nasdaq to get money and grow. People who buy shares in IPOs might make money as these new companies go public.

A strong economy leads to a "bull market," where the overall market goes up by 20% or more for at least two months straight.

Most stocks traded are common stocks, but some people buy preferred stocks. These pay an agreed-upon dividend regularly but don't let you vote in company decisions. They're less risky but usually offer smaller returns. Preferred stocks work a bit like bonds with a set return and offer some protection if things go bad.


Investing in the stock market is seen as a great way to make more money than inflation over the years. Usually, the returns from stocks are higher than those from other things you might invest in, like bonds or commodities.

There are two ways investors can make money—by trading and by holding onto stocks. Investors who trade do lots of buying and selling, taking advantage of small price changes. Those who buy and hold prefer to watch their stocks grow in value over time. Sometimes, the companies they invest in give them regular payments called dividends as an extra reward.

Risks of Stock Market Investing

The biggest problem is that if a stock's price drops to ₹0, you might lose all the money you put in. If the company goes out of business, people who invested in its stocks get paid last. Because of this, investing in stocks can feel like a bumpy ride of emotions.


Fees can eat up a lot of your investment money, and there's a real worry about the chance of fraud.

If people believe the economy is slowing down, they might choose to invest in bonds, which are safer, although they have their own risks. Bonds give a set return for the loan's duration and usually do well when the economy isn't doing great.

When stock prices drop by less than 10%, it's called a stock market correction. If prices fall that much or more in one day, it's called a stock market crash. A crash can cause a recession. History shows that stock market crashes happen regularly.

If prices fall by 20% or more, it's called a bear market. A bear market lasts at least two months, but on average, it can stick around for about 11 months, sometimes lasting 20 months or longer.

How to Invest in the Stock Market

You have at least eight different ways to invest your money in the stock market.

1. The fastest and cheapest way is to buy stocks online through discount brokers like E-Trade, Merrill Edge, or TD Ameritrade. They charge no fees for trading stocks and small fees for some other things like mutual funds. There are also newer app-based brokers such as Robinhood and Acorns, where you can invest using your phone, but they don’t offer personal advice.

2. If you want more guidance without spending too much, you can join an investment club. These groups research and invest together.

3. Full-service brokers cost more but they provide professional advice based on your goals and budget.

4. Big investment banks like Goldman Sachs or Bank of America-Merrill Lynch don’t just trade but also help with financial planning.

5. Money managers do all the work for you but charge more.

6. Fee-only financial advisors charge annually and can help you pick investments or even make trades for you.

7. Instead of buying individual stocks, you could invest in index funds or mutual funds. Many people choose these because they offer a wide variety of investments picked by experts.

8. The riskiest option is a hedge fund. They might invest in things like derivatives, which can bring higher returns but also higher risks.


Before hiring any investment professional, do research to avoid losing your money to fraud.

Other Types of Financial Markets

The stock market is only one of many financial markets. Before you invest, make sure you understand all the different types.

  • Commodities, like grains, oil, and the oddly named pork bellies, are often traded using futures options, making them a bit complex.
  • Foreign exchange involves buying and selling currencies. It's quite risky because the values can change very fast and unexpectedly without clear reasons.
  • Derivatives are tricky investments that get their value from other assets, like subprime mortgages. It's best for regular investors to avoid them. While they might bring big profits, they could also wipe out all your savings in just one day.

Frequently Asked Questions (FAQs)

When does the stock market open and close?

The stock market usually starts at 9:30 a.m. EST from Monday to Friday, except on holidays when it's closed. It usually ends at 4 p.m., but on holidays, it might close earlier. Some brokerages also let people trade during extended hours, like from 7 a.m. to 8 p.m.

How do you make money on the stock market?

There are two main ways to earn from stocks. One way is through capital gains—when you sell a stock for more than what you bought it for. If stock prices rise, people might sell their shares to make a profit or keep them, expecting prices to go even higher for more profit. The other way is through dividends. Companies pay shareholders a part of their profits as dividends.

Written by Sauravsingh

Techpreneur and adept trader, Sauravsingh Tomar seamlessly blends the worlds of technology and finance. With rich experience in Forex and Stock markets, he's not only a trading maven but also a pioneer in innovative digital solutions. Beyond charts and code, Sauravsingh is a passionate mentor, guiding many towards financial and technological success. In his downtime, he's often found exploring new places or immersed in a compelling read.

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