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Stock Market: Definition & How It Works
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Stock Market: What It Is, How It Works
The stock market is where investors connect to buy and sell investments — most commonly, stocks, which are shares of ownership in a public company.
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12 years of experience Expertise Brokerage accounts stock market cryptocurrencyChris Davis is a Managing Editor on the Investing team. He has passed the Series 65 (Uniform Investment Adviser Law Exam) and covered the stock market, investing strategies, investment accounts and cryptocurrency. His work has appeared in The Associated Press, The Washington Post, MSN, Yahoo Finance, MarketWatch, Newsday and TheStreet.
Chris Davis is a Managing Editor on the Investing team. He has passed the Series 65 (Uniform Investment Adviser Law Exam) and covered the stock market, investing strategies, investment accounts and cryptocurrency. His work has appeared in The Associated Press, The Washington Post, MSN, Yahoo Finance, MarketWatch, Newsday and TheStreet. Published in Managing Editor + more + more
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19 years of experience Expertise Retirement planning investment management investment accountsArielle O’Shea leads the investing and taxes team at NerdWallet. She has covered personal finance and investing for nearly 20 years, and was a senior writer and spokesperson at NerdWallet before becoming an editor. Previously, she was a researcher and reporter for leading personal finance journalist and author Jean Chatzky, a role that included developing financial education programs, interviewing subject matter experts and helping to produce television and radio segments. Arielle has appeared on the "Today" show, NBC News and ABC's "World News Tonight," and has been quoted in national publications including The New York Times, MarketWatch and Bloomberg News. She is based in Charlottesville, Virginia.
Arielle O’Shea leads the investing and taxes team at NerdWallet. She has covered personal finance and investing for nearly 20 years, and was a senior writer and spokesperson at NerdWallet before becoming an editor. Previously, she was a researcher and reporter for leading personal finance journalist and author Jean Chatzky, a role that included developing financial education programs, interviewing subject matter experts and helping to produce television and radio segments. Arielle has appeared on the "Today" show, NBC News and ABC's "World News Tonight," and has been quoted in national publications including The New York Times, MarketWatch and Bloomberg News. She is based in Charlottesville, Virginia. Published in Head of Content, Investing & Taxes + more + more
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9 years of experience Expertise Stocks ETFs economic newsSam Taube writes about investing for NerdWallet. He has covered investing and financial news since earning his economics degree from the University of Maryland in 2016. Sam has previously written for Investopedia, Benzinga, Seeking Alpha, Wealth Daily and Investment U, and has worked as an editor for Investment U, Wealth Daily and Haven Investment Letter. He is based in Brooklyn, New York.
Sam Taube writes about investing for NerdWallet. He has covered investing and financial news since earning his economics degree from the University of Maryland in 2016. Sam has previously written for Investopedia, Benzinga, Seeking Alpha, Wealth Daily and Investment U, and has worked as an editor for Investment U, Wealth Daily and Haven Investment Letter. He is based in Brooklyn, New York. Published in Lead Writer + more + moreWhat is the stock market?
What is the stock market?When you purchase a company's stock, you're buying a small piece of that company. The stock market is where investors buy and sell shares of stock. Companies list these shares and securities for trading on a set of exchanges (e.g., the New York Stock Exchange), but investors can also trade securities directly with each other through what is known as an over-the-counter (OTC) marketplace.
When you purchase a company's stock , you're buying a small piece of that company. The stock market is where investors buy and sell shares of stock. Companies list these shares and securities for trading on a set of exchanges (e.g., the New York Stock Exchange), but investors can also trade securities directly with each other through what is known as an over-the-counter (OTC) marketplace.In practice, the term "stock market" often refers to one of the major stock market indexes, such as the Dow Jones Industrial Average (DJIA) or the S&P 500. Because it's hard to track every single company, the performance of the indexes — which represent large sections of the stock market — is viewed as representative of the entire market.
In practice, the term "stock market" often refers to one of the major stock market indexes, such as the Dow Jones Industrial Average (DJIA) or the S&P 500 . Because it's hard to track every single company, the performance of the indexes — which represent large sections of the stock market — is viewed as representative of the entire market.You might see a news headline that says the stock market is up or down for the day. This often means stock market indexes have increased or decreased, and stocks within the index have gained or lost value. Investors who buy and sell stocks hope to profit through this movement in stock prices.
You might see a news headline that says the stock market is up or down for the day. This often means stock market indexes have increased or decreased, and stocks within the index have gained or lost value. Investors who buy and sell stocks hope to profit through this movement in stock prices.» Learn more: How to invest in stocks
» Learn more: » Learn more: » Learn more: How to invest in stocksBrokerage firms
Brokerage firms
Brokerage firmson Charles Schwab's website
on E*TRADE's website
on Vanguard's website
on Fidelity's website
How the stock market works
How the stock market worksThe stock market works through a network of exchanges. Popular ones include the New York Stock Exchange or the Nasdaq. Companies list shares of their stock on an exchange through a process called an initial public offering (IPO). Investors purchase those shares, which allows the company to raise money to grow its business. Investors can then buy and sell these stocks among themselves.
The stock market works through a network of exchanges. Popular ones include the New York Stock Exchange or the Nasdaq. Companies list shares of their stock on an exchange through a process called an initial public offering (IPO). Investors purchase those shares, which allows the company to raise money to grow its business. Investors can then buy and sell these stocks among themselves.Buyers offer a “bid,” or the highest amount they’re willing to pay, usually lower than the amount sellers “ask” for in exchange. This difference is called the bid-ask spread. For a trade to occur, either the buyer must increase their price or the seller must decrease theirs.
Buyers offer a “bid,” or the highest amount they’re willing to pay, usually lower than the amount sellers “ask” for in exchange. This difference is called the bid-ask spread. For a trade to occur, either the buyer must increase their price or the seller must decrease theirs.Computer algorithms generally do most price-setting calculations. You’ll see the bid, ask and bid-ask spread on your broker's website when buying stock. In many cases, the difference will be pennies and not much concern for beginner and long-term investors.
Computer algorithms generally do most price-setting calculations. You’ll see the bid, ask and bid-ask spread on your broker's website when buying stock. In many cases, the difference will be pennies and not much concern for beginner and long-term investors.The U.S. Securities and Exchange Commission (SEC) regulates the stock market, and the SEC’s mission is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."
The U.S. Securities and Exchange Commission (SEC) regulates the stock market, and the SEC’s mission is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."Historically, stock trades likely took place in a physical marketplace. These days, the stock market works electronically through online stockbrokers. Each trade happens on a stock-by-stock basis, but overall stock prices often move because of news, political events, economic reports and other factors.
Historically, stock trades likely took place in a physical marketplace. These days, the stock market works electronically through online stockbrokers. Each trade happens on a stock-by-stock basis, but overall stock prices often move because of news, political events, economic reports and other factors.» See NerdWallet's list of the best online stock brokers for beginners
» » See NerdWallet's list of the best online stock brokers for beginnersHow do you invest in the stock market?
How do you invest in the stock market?You don’t have to officially become an “investor” to invest in the stock market — for the most part, it’s open to anyone.
You don’t have to officially become an “investor” to invest in the stock market — for the most part, it’s open to anyone.You can purchase stocks online between 9:30 a.m. and 4 p.m. ET through the stock market, which anyone can access with a brokerage account, robo-advisor or employee retirement plan. Investing outside of these hours is called premarket trading or after-hours trading and carries additional risks.
You can purchase stocks online between 9:30 a.m. and 4 p.m. ET through the stock market, which anyone can access with a brokerage account, robo-advisor or employee retirement plan. Investing outside of these hours is called premarket trading or after-hours trading and carries additional risks.If you have a 401(k) through your workplace, you may already be invested in the stock market. Mutual funds, often composed of stocks from many different companies, are common in 401(k)s.
If you have a 401(k) through your workplace, you may already be invested in the stock market. Mutual funds, often composed of stocks from many different companies, are common in 401(k)s.You can purchase individual stocks through a brokerage account or an individual retirement account (IRA). Once you open and fund an account with an online broker, you can begin to buy and sell investments. The broker acts as the middleman between you and the stock exchanges.
You can purchase individual stocks through a brokerage account or an individual retirement account (IRA). Once you open and fund an account with an online broker, you can begin to buy and sell investments. The broker acts as the middleman between you and the stock exchanges.Online brokerages have made the signup process simple, and once you fund the account, you can take your time selecting the right investments for you.
Online brokerages have made the signup process simple, and once you fund the account, you can take your time selecting the right investments for you.With any investment, there are risks. But stocks carry more risk — and more potential for reward — than some other securities. While the market's history of gains suggests that a diversified stock portfolio will increase in value over time, stocks also experience sudden dips.
With any investment, there are risks. But stocks carry more risk — and more potential for reward — than some other securities. While the market's history of gains suggests that a diversified stock portfolio will increase in value over time, stocks also experience sudden dips.To build a diversified portfolio without purchasing many individual stocks, you can invest in a type of mutual fund called an index fund or an exchange-traded fund. These funds aim to passively track the performance of an index by holding all the stocks or investments that comprise it. For example, you can invest in the DJIA, the S&P 500 and other market indexes through index funds and ETFs.
To build a diversified portfolio without purchasing many individual stocks, you can invest in a type of mutual fund called an index fund or an exchange-traded fund . These funds aim to passively track the performance of an index by holding all the stocks or investments that comprise it. For example, you can invest in the DJIA, the S&P 500 and other market indexes through index funds and ETFs.Stocks and stock mutual funds are ideal for a long time horizon — like retirement — but unsuitable for a short-term investment (generally defined as money you need for an expense within five years). With a short-term investment and a hard deadline, there's a greater chance you'll need that money back before the market has had time to recover losses.
Stocks and stock mutual funds are ideal for a long time horizon — like retirement — but unsuitable for a short-term investment (generally defined as money you need for an expense within five years). With a short-term investment and a hard deadline, there's a greater chance you'll need that money back before the market has had time to recover losses.What is the stock market doing today?
What is the stock market doing today?Investors often track the stock market's performance by looking at a broad market index like the S&P 500 or the DJIA. The chart below shows the current performance of the stock market — as measured by the S&P 500's closing price on the most recent trading day — and the S&P 500's historical performance since 1990.
Investors often track the stock market's performance by looking at a broad market index like the S&P 500 or the DJIA. The chart below shows the current performance of the stock market — as measured by the S&P 500's closing price on the most recent trading day — and the S&P 500's historical performance since 1990.Stock market data may be delayed up to 20 minutes and is intended solely for informational purposes, not for trading purposes.
Stock market data may be delayed up to 20 minutes and is intended solely for informational purposes, not for trading purposes. Stock market data may be delayed up to 20 minutes and is intended solely for informational purposes, not for trading purposes.What is stock market volatility?
What is stock market volatility?Investing in the stock market does come with risks, but with the right investment strategies, it can be done safely with minimal risk of long-term losses. Day trading, which requires rapidly buying and selling stocks based on price swings, is extremely risky. Conversely, investing in the stock market for the long term has proven to be an excellent way to build wealth over time.
Investing in the stock market does come with risks, but with the right investment strategies, it can be done safely with minimal risk of long-term losses. Day trading, which requires rapidly buying and selling stocks based on price swings, is extremely risky. Conversely, investing in the stock market for the long term has proven to be an excellent way to build wealth over time.For example, the S&P 500 has a historical average annualized total return of about 10% before adjusting for inflation. However, the market will rarely provide that return on a year-to-year basis. In some years, the stock market could end down significantly, while in others, it could go up tremendously. These large swings are due to market volatility or periods when stock prices rise and fall unexpectedly.
For example, the S&P 500 has a historical average annualized total return of about 10% before adjusting for inflation. However, the market will rarely provide that return on a year-to-year basis. In some years, the stock market could end down significantly, while in others, it could go up tremendously. These large swings are due to market volatility or periods when stock prices rise and fall unexpectedly.If you’re actively buying and selling stocks, there’s a good chance you’ll get it wrong at some point, buying or selling at the wrong time, resulting in a loss. The key to investing safely is to stay invested — through the ups and the downs — in low-cost index funds that track the whole market so that your returns might mirror the historical average.
If you’re actively buying and selling stocks, there’s a good chance you’ll get it wrong at some point, buying or selling at the wrong time, resulting in a loss. The key to investing safely is to stay invested — through the ups and the downs — in low-cost index funds that track the whole market so that your returns might mirror the historical average.What's the point of the stock market?
What's the point of the stock market?The point of the stock market is to provide a place where anyone can buy and sell fractional ownership in a publicly traded company. It distributes control of some of the world’s largest companies among hundreds of millions of individual investors. And the buying and selling decisions of those investors determine the value of those companies.
The point of the stock market is to provide a place where anyone can buy and sell fractional ownership in a publicly traded company. It distributes control of some of the world’s largest companies among hundreds of millions of individual investors. And the buying and selling decisions of those investors determine the value of those companies.The market lets buyers and sellers negotiate prices. This negotiation process maximizes fairness for both parties by providing both the highest possible selling price and the lowest possible buying price at a given time. Each exchange tracks the supply and demand of stocks listed there.
The market lets buyers and sellers negotiate prices. This negotiation process maximizes fairness for both parties by providing both the highest possible selling price and the lowest possible buying price at a given time. Each exchange tracks the supply and demand of stocks listed there.Supply and demand help determine the price for each security, or the levels at which stock market participants — investors and traders — are willing to buy or sell. This process is called price discovery, and it’s fundamental to how the market works. Price discovery plays an important role in determining how new information affects the value of a company.
Supply and demand help determine the price for each security, or the levels at which stock market participants — investors and traders — are willing to buy or sell. This process is called price discovery, and it’s fundamental to how the market works. Price discovery plays an important role in determining how new information affects the value of a company.For example, imagine a publicly traded company with a market capitalization (market value) of $1 billion that trades at a share price of $20.
For example, imagine a publicly traded company with a market capitalization (market value) of $1 billion that trades at a share price of $20.Suppose a larger company announces a deal to acquire the smaller company for $2 billion, pending regulatory approval. If the deal goes through, it would represent a doubling of the company’s value. However, investors might want to prepare for regulators blocking the deal.
Suppose a larger company announces a deal to acquire the smaller company for $2 billion, pending regulatory approval. If the deal goes through, it would represent a doubling of the company’s value. However, investors might want to prepare for regulators blocking the deal.If the deal seems like a sure thing, sellers might raise their asks to $40, and buyers might increase their bids to meet those asks. But if there’s a chance the deal won’t be approved, buyers might only be willing to offer bids of $30. If they’re very pessimistic about the deal’s chances, they might keep their bids at $20.
If the deal seems like a sure thing, sellers might raise their asks to $40, and buyers might increase their bids to meet those asks. But if there’s a chance the deal won’t be approved, buyers might only be willing to offer bids of $30. If they’re very pessimistic about the deal’s chances, they might keep their bids at $20.In this way, the market can determine how a complicated piece of new information — a takeover deal that might not go through — should affect the company’s market value.
In this way, the market can determine how a complicated piece of new information — a takeover deal that might not go through — should affect the company’s market value.Next steps
Next stepsNo brokerage account? Learn how to open one
No brokerage account? No brokerage account? Learn how to open oneReady to trade? See our top-rated online stock brokers
Ready to trade? Ready to trade? See our top-rated online stock brokersCurious about IPOs? View the best brokers for investing in IPOs
Curious about IPOs? Curious about IPOs? View the best brokers for investing in IPOs About the authors Chris Davis Chris Davis Chris Davis is a Managing Editor on the Investing team. He has passed the Series 65 (Uniform Investment Adviser Law Exam) and covered the stock market, investing strategies, investment accounts and cryptocurrency. His work has appeared in The Associated Press, The Washington Post, MSN, Yahoo Finance, MarketWatch, Newsday and TheStreet. See full bio. Sam Taube Sam Taube Sam Taube writes about investing for NerdWallet. He has covered investing and financial news since earning his economics degree in 2016. See full bio.ON THIS PAGE
What is the stock market? What is the stock market? How the stock market works How the stock market works How do you invest in the stock market? How do you invest in the stock market? What is the stock market doing today? What is the stock market doing today? What is stock market volatility? What is stock market volatility? What's the point of the stock market? What's the point of the stock market? Next steps Next stepsON THIS PAGE
What is the stock market? What is the stock market? How the stock market works How the stock market works How do you invest in the stock market? How do you invest in the stock market? What is the stock market doing today? What is the stock market doing today? What is stock market volatility? What is stock market volatility? What's the point of the stock market? What's the point of the stock market? Next steps Next steps More like this Investment Basics Investing Stocks How to Invest in Stocks Learn how to invest in stocks, including how to select a brokerage account and research stock market investments. 2 By Chris Davis, Sam Taube Investment Calculator Use our free investment return calculator to estimate how your money can grow. Enter your planned contributions, timeline, rate of return and compounding frequency to get started. Chris Davis What Is a Brokerage Account? Where and How to Open One Opening a brokerage account is the first step to investing. You can open one in as little as 15 minutes, but you'll need to fund it and select investments to start building out your portfolio. 2 By Arielle O'Shea, Pamela de la Fuente Best Investments: Where to Invest in 2026 Wondering where to invest your money this year? High-yield savings accounts, CDs, bonds, funds and stocks are all considered among the best investments available. Learn more about the risks, potential returns and how to get started. 2 By Chris Davis, Alieza Durana Best Brokers for Beginner Investors: Top Picks for 2026 We spent hours analyzing the best brokers for beginners to find ones that offer low costs, helpful educational content and a broad investment selection. Our testers also looked for trading platforms that are easy to navigate. 2 By Alana Benson, Bella Avila How to Invest in Stocks Learn how to invest in stocks, including how to select a brokerage account and research stock market investments. 2 By Chris Davis, Sam Taube Investment Calculator Use our free investment return calculator to estimate how your money can grow. Enter your planned contributions, timeline, rate of return and compounding frequency to get started. Chris Davis What Is a Brokerage Account? Where and How to Open One Opening a brokerage account is the first step to investing. You can open one in as little as 15 minutes, but you'll need to fund it and select investments to start building out your portfolio. 2 By Arielle O'Shea, Pamela de la Fuente Best Investments: Where to Invest in 2026 Wondering where to invest your money this year? High-yield savings accounts, CDs, bonds, funds and stocks are all considered among the best investments available. Learn more about the risks, potential returns and how to get started. 2 By Chris Davis, Alieza Durana Best Brokers for Beginner Investors: Top Picks for 2026 We spent hours analyzing the best brokers for beginners to find ones that offer low costs, helpful educational content and a broad investment selection. Our testers also looked for trading platforms that are easy to navigate. 2 By Alana Benson, Bella Avila How to Invest in Stocks Learn how to invest in stocks, including how to select a brokerage account and research stock market investments. 2 By Chris Davis, Sam Taube Investment Calculator Use our free investment return calculator to estimate how your money can grow. Enter your planned contributions, timeline, rate of return and compounding frequency to get started. Chris Davis What Is a Brokerage Account? Where and How to Open One Opening a brokerage account is the first step to investing. You can open one in as little as 15 minutes, but you'll need to fund it and select investments to start building out your portfolio. 2 By Arielle O'Shea, Pamela de la Fuente Best Investments: Where to Invest in 2026 Wondering where to invest your money this year? High-yield savings accounts, CDs, bonds, funds and stocks are all considered among the best investments available. Learn more about the risks, potential returns and how to get started. 2 By Chris Davis, Alieza Durana