Ticker&TapeWhat the stock market is
Every day millions of people buy and sell small pieces of companies. This lesson explains what the stock market actually is, why it exists and who is on the other side when you click buy.
A market for pieces of companies
A stock, or share, is a small piece of ownership in a company. The stock market is simply the place where those pieces are bought and sold. It works like any other market: there are people who want to buy, people who want to sell, and a price where they agree.
Imagine a company split into 100 million shares. If you buy 100 shares at $50 each, you pay $5,000 and own one millionth of the business. If the company grows and investors later pay $75 per share, your stake is worth $7,500. If the company struggles and the price drops to $30, it is worth $3,000. Owning stock means you share in both the good and the bad.
Why it exists
The market solves a problem for two groups at once. Companies need money to grow: to build factories, hire engineers or open new stores. Instead of only borrowing from a bank, they can sell shares to the public. The first time a company does this is called an IPO (initial public offering). The money from the IPO goes to the company.
Investors want their savings to grow. By buying shares, they get a claim on a business's future profits, sometimes paid out as dividends (cash the company distributes to shareholders) and, more often for growth companies, reflected in a rising share price.
After the IPO, the company is mostly out of the picture. When you buy a share today, you almost always buy it from another investor, not from the company. This trading between investors is called the secondary market, and it is what you see moving on a chart every day.
Who participates
Many different players meet in the same market, each with their own goals:
- Individual investors and traders (often called retail): people like you, buying through a brokerage account. They are numerous but each one is small.
- Institutions: mutual funds, pension funds, hedge funds, insurance companies and ETFs. They manage billions of dollars and do most of the buying and selling, so their decisions move prices the most.
- Market makers: firms that constantly offer to buy and to sell a stock at the same time. They earn a small difference between the two prices and make sure there is almost always someone on the other side of your order.
- Regulators: in the U.S., the SEC and FINRA write and enforce the rules, require companies to publish their results and police fraud.
Exchanges and how a share changes hands
An exchange is the organized marketplace where orders meet. The two main U.S. exchanges are the New York Stock Exchange (NYSE) and the Nasdaq. Today almost all trading is electronic: there is no shouting on a trading floor, just computers matching orders in fractions of a second. Regular trading runs from 9:30 a.m. to 4:00 p.m. New York time on weekdays.
Here is what happens when you buy. Suppose the highest price anyone is offering to pay for a stock (the bid) is $49.98 and the lowest price anyone is willing to sell at (the ask) is $50.00. You send an order through your broker to buy 20 shares at the market. The order is routed to an exchange or market maker, matched with a seller at $50.00, and within a second you own 20 shares worth $1,000. The ownership record settles a business day later. You will learn the different ways to place orders in order types.
Why the world trades the U.S. market
The U.S. stock market is the largest in the world. U.S.-listed companies are worth roughly half of all listed companies on the planet, and many of the biggest and fastest-growing businesses, especially in technology, trade there. That brings three advantages for a trader anywhere:
First, liquidity: so many shares trade every day that you can usually buy and sell at a fair price instantly. Second, choice: thousands of stocks and ETFs across every sector. Third, transparency: companies must report their results every quarter under strict rules, so information is easy to find. You can study those results on the Fundamentals page.
That is why the lessons in this school use U.S. stocks and indexes. If you live outside the U.S., check what access your local brokers offer and what rules apply in your country.
Common mistakes
- Thinking that buying a share sends money to the company; after the IPO you are buying from another investor.
- Forgetting that ownership works both ways: if the business does badly, your shares can lose a lot of value.
- Assuming the market is a casino with no logic; prices reflect the decisions of millions of buyers and sellers, led by large institutions.
Key points
- The stock market lets companies raise money and lets investors share in their growth.
- Individuals, institutions and market makers all trade on exchanges like the NYSE and Nasdaq, under rules set by regulators.
- When you buy, an electronic system matches your order with a seller in about a second.
- The U.S. market is the biggest and most liquid, which is why traders worldwide focus on it.
Check what you learned
Answer at least 2 of 3 correctly to complete the lesson.
1. You buy 50 shares of a company that went public ten years ago. Where does your money go?
After the IPO, shares trade between investors in the secondary market. Your money goes to the seller; the exchange only matches the order.
2. Which group usually has the biggest influence on stock prices?
Institutions manage enormous amounts of money and do most of the trading, so their buying and selling moves prices the most.
3. Why do traders around the world focus on the U.S. stock market?
Size, liquidity, a wide choice of companies and transparent reporting make the U.S. market attractive. It can still fall, sometimes sharply.
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