What Is the Stock Market? How Does It Work?

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The stock market and stock trading are complex. But with the right strategy, they can be a great way to grow your money over time. It’s the reason why most American households own stocks in some shape or form. In fact, according to a 2025 Gallup survey, over 60% of U.S. adults are invested in the stock market right now.

If you’re thinking of investing in stocks but don’t quite know where to start, these expert tips will teach you how to invest like a pro.

What Are Stocks and How Do They Work?

When you buy a stock, also known as a share, you purchase a fraction of that company. In general, you buy shares in hopes of profiting from increases in a stock’s valuation and/or from dividends, portions of the company’s profits paid to investors.

Investing in stocks is meant to be mutually beneficial: Businesses sell stocks to raise money to support their operations or growth, and investors buy them to make money as the company grows.

Stocks are traded on public stock exchanges. The value of a particular stock (its price) fluctuates based on market trends, company performance, investor sentiment—the overall attitude investors have toward the stock market and whether they believe stock value will rise (also known as bullish) or fall (referred to as bearish)—among other factors.

What Is the Stock Market?

In essence, the stock market is a network that connects investors to stocks available for purchase. It’s a network of marketplaces where investors can buy and sell shares of publicly traded companies.

What Are Major Stock Exchanges?

The U.S. is home to the two largest stock exchanges in the world.

NYSE (New York Stock Exchange)

Located on Wall Street in New York City, NYSE is the largest stock exchange in the world by market capitalization. This exchange was established in 1792 and has since become a leader in global finance.

Known for its busy trading floor and opening and closing bells, the NYSE has more than 2,300 companies listed on its digital marketplace, with access to 8,000 securities listed on U.S. stock exchanges.

Nasdaq (National Association of Securities Dealers Automated Quotations)

Nasdaq has been a computer-based trading exchange since its founding in 1971. As the world’s second-largest stock exchange it is a leader in the technology sector, with top tech stock companies like Apple (AAPL) and Microsoft (MSFT).

Additional Financial Exchanges in the U.S.

The market comprises numerous financial exchanges, many of which are named after the city in which they are located. There are several other exchanges and trading venues, such as the Miami International Securities Exchange (MIAX) and CBOE Global Markets. Older exchanges, such as the Boston Stock Exchange and Philadelphia Stock Exchange, have been absorbed into Nasdaq.

How Does the Stock Market Work?

You can buy publicly traded stocks from companies on a stock exchange like the NYSE or the Nasdaq.

When you buy a stock, in general, you’re seeking to earn money from your investment, while the company that you invest in is typically looking to raise capital for growth and its operations.

To make shares available for public purchase, private companies list their stock shares on a stock exchange, a process called an initial public offering, or IPO. Once listed on a stock exchange, you can purchase the stock through a broker or online brokerage.

Millions of trades take place each day, and behind the scenes, brokers and electronic trading platforms facilitate transactions. Stock prices fluctuate based on numerous factors, such as:

• Company performance. Profits, potential and actual revenue growth and just the overall general health of the company.
• Investor expectations. Some stocks like tech and AI stocks (e.g., Amazon or Nvidia) trade for a premium, so it’s assumed that these companies will meet or beat their earnings expectations.
• Economic conditions. Interest rates and macroeconomic climate can affect overall economic growth and weigh on a company’s overall operations and performance.
• Market sentiment. You might have heard the saying “buy the rumor, sell the news.” That’s one form of market sentiment. In this example, news cycles and press releases can impact a stock’s value. Speculation can send that company’s stock price up in the days or weeks before the positive announcement. And once the positive news is realized, the stock may drop in price.

This makes the stock market a dynamic entity that changes by the hour, if not the minute.

Stock Market vs. Stock Exchange

Although often used interchangeably, the stock market and a stock exchange are distinct entities. The stock market is made up of individual stock exchanges, whereas a stock exchange is a market where stocks are bought and sold.

Each stock exchange is subject to its own rules that ensure fair trading practices and a set of requirements—commonly share price, market capitalization, financial reports and types of board members—for stocks to be listed there. Stock exchanges report prices in real time so that traders and financial news outlets can report on the most recent price changes.

What Is a Stock Market Index?

A market index is a list of investments—such as stocks, bonds and real estate—that investors follow to gauge market movements. For stocks, the S&P 500, Dow Jones Industrial Average (DJIA) and Nasdaq indexes are popular indexes to follow, and the Bloomberg U.S. Aggregate Bond Index is a leader for bond indexes.

Each market index has its own method for calculating value, which can affect how it reflects market performance. For example, the DJIA uses a price-weighted method, which means companies with higher stock prices have more influence on the index’s movement.

In contrast, the S&P 500 is market-cap weighted, so larger companies like Apple (AAPL) or Microsoft (MSFT) carry more weight in determining how the index performs.

A stock market index, also known as a stock index or simply an index, tracks the performance of a specified group of stocks. Many investors compare the performance of stocks by comparing them to the performance of a popular stock index, like the S&P 500.

Stock indexes provide a straightforward means of tracking the overall health of the stock market. They can also help investors anticipate the market’s potential response to specific events, such as a pandemic or a presidential election. Further, investing in a stock market index can be a solid move for anyone just getting into stocks.

What Is a Stock Split?

A stock split is when a company divides one share into multiple shares. This action lowers the price of the stock and increases the number of available shares without affecting the company’s market value. Stock splitting makes shares more attainable for investors, can increase trading volume and typically indicates the company feels confident in its future growth.

A popular example of a stock split. The stock price for Chipotle, the Denver company known for its burrito-making restaurants, stood at around $3,300 per share before its 50-for-1 stock split on June 18, 2024. The stock split didn’t change the company’s valuation, but it did make stocks more accessible to retail investors at $65 per share.

What Is Stock Market Volatility?

Stock market volatility refers to how quickly and to what extent stock prices go up or down in a given time span. Some days stock prices increase, while other days they go down, and the more drastic the price changes, the higher the level of volatility.

Different types of investors treat volatility differently. Those who focus on long-term investments, such as in a 401(k) retirement account, often don’t pay attention to day-to-day stock market volatility. Their focus is on long-term investments that grow steadily over time, rather than the short-term fluctuations of stock market prices.

Options and day traders, on the other hand, divert their attention almost entirely to stock volatility to profit from it. They closely monitor price movements, trading volume and market indicators to identify short-term opportunities. But this style of investing is risky, as a sudden price swing can turn a profitable trade into a loss within minutes.

Who Regulates the Stock Market?

The U.S. Securities and Exchange Commission (SEC) is the primary regulatory body of the stock market. The agency works to maintain fair, transparent and efficient markets. Thanks to SEC rules, companies that publicly trade on the stock market are required to be honest and transparent about their business, which protects investors and traders.

Other organizations also play a role in regulation. The Financial Industry Regulatory Authority (FINRA) enforces ethical standards, monitors trading activity for suspicious behavior, and helps protect investors from fraud.

In the derivatives market, the Commodity Futures Trading Commission (CFTC) regulates financial derivatives like futures and swaps so that investors are protected from manipulation and abusive practices.

Who Are Investors and Traders?

Investors and traders both actively participate in the stock market, but they differ in their goals, strategies and timelines.

Investors are typically in it for the long haul. They buy and hold assets for the long term, focusing on gradual growth and steady returns. They might invest through 401(k) retirement accounts, mutual funds or individual stocks to build wealth over years or even decades.

Traders are the opposite, as they seek to profit from short-term price movements. They thrive on volatility, and may buy and sell stocks within days, hours or even minutes to turn a profit. Traders rely heavily on technical analysis, market trends and timing to make quick decisions.

How To Invest in the Stock Market

As you research stocks and determine what to invest in, track changes in the market and make sure you understand what the business does, how it makes money and why you think it can grow.

“The stock market rewards preparation, not prediction,” says Med Yacoub, the marketing director at stock investing platform Tradesk Securities. “Beginners should understand that trading success starts with education, risk management and clear goals, not chasing the next hot stock,” he says.

“Start with knowledge, not emotion. Learn how markets move, how to read charts and how to interpret company performance before risking real capital,” Yacoub says. Only when you are familiar with how the market moves, understand industry trends and have researched the companies you plan to invest in should you buy stock.

Before you open a brokerage account, identify your goals, personal risk tolerance and overall timeline. Then, research the different platforms offered by reputable brokers, like Webull, Charles Schwab or Fidelity. Once your account is set up, fund it with cash and begin investing.

How To Buy Stocks with a Broker

You can buy and sell shares through a brokerage account, either online or with the help of a financial advisor. When you’re ready to sell, the process is similar: You place a sell order through your broker. If your shares have appreciated, you’ll see a capital gain, but if the price has dropped, you may take a capital loss.

As famous investor Peter Lynch famously said, “Buy what you know.” This holds, as large, well-known companies boast strong brands, have long track records of success and a history of happy customers. Successful companies are likely to continue growing, along with the worth of the stock.

Knowledge is power, especially when buying stocks. “Rather than chasing stock tips, beginners should look for companies with transparent financials, consistent performance and strong fundamentals in industries they understand,” Yacoub says. The more information you can learn about a company, the more confident you can be in your investment.

For novice investors, experts recommend investing in exchange-traded funds (ETFs) or other stock funds instead of individual stocks.

Don’t pick individual stocks first. I mean it. Pick a basket. I suggest three to five ETFs that give you exposure to sectors like healthcare, technology, consumer discretionary, staples and energy.
– Eric Croak, certified financial planner, accredited wealth management advisor and president of Croak Capital, an Ohio-based fiduciary financial firm

Croak suggests you keep your position sizes equal and watch how those baskets move with the market before thinking about stock picking. “ETFs are training wheels… and those aren’t a bad thing when things get bumpy,” he says.

Other Types of Markets

The stock market refers to markets and exchanges where equity shares and related securities are traded. Other types of financial assets, like cryptocurrencies, have their own markets, including:

• Over-the-counter markets: OTC markets are a venue for trading that takes place outside of major stock exchanges. OTC trades are primarily made directly between sellers and buyers. The ability to buy a particular OTC stock depends on your broker and online brokerage.
• Commodities markets: Raw materials like gold, steel, coal and oil are traded on commodities markets. The major commodities are energy, metals, agriculture and livestock.
• Derivatives: Derivatives are financial contracts about whether individual securities’ values will rise or fall. Securities can be stocks, bonds or commodities, to name a few examples.
• Foreign exchange markets: Forex trading is a borderless, international market for exchanging currencies.
• Cryptocurrency: Bitcoin, ethereum and other cryptocurrencies are traded on specialized crypto exchanges, but some investing apps also have crypto trading.