Most people hear the phrase “the market was down today” and just nod along. But if you’ve ever wondered what that actually means, or why it matters to your financial life, you’re asking the right question. The stock market is one of the most referenced topics in financial news, yet most people never get a clear, honest explanation of how it works.
This article walks you through everything you need to know: what the stock market is, how stock prices are set, who actually participates, and how it connects to your own money. We pulled from historical market data, regulatory sources, and decades of publicly available research to give you accurate, grounded information, not vague generalities.
What the Stock Market Is
The stock market is a system where buyers and sellers trade ownership stakes in publicly listed companies. When a company wants to raise money to grow, it can sell small pieces of itself to the public. Those pieces are called shares, or stocks.
Once those shares exist, investors trade them with each other on an ongoing basis, and that constant exchange of buying and selling is what most people mean when they say “the stock market.”
One thing worth clarifying early: the stock market is not a single physical place. It is a network of exchanges, electronic platforms, and financial institutions that operate together. The vast majority of trades today happen digitally, often in milliseconds.
What a Stock Is
A stock represents a unit of ownership in a company. If a company has issued one million shares and you own 1,000 of them, you own 0.1% of that business. That entitles you to a proportional slice of the company’s value and, in some cases, a share of its profits paid out as dividends.
Companies issue stock through a process called an Initial Public Offering, or IPO. This is the moment a private company becomes a public one by making its shares available to outside investors for the first time. Companies pursue IPOs because it is one of the most efficient ways to raise large amounts of capital; far more than most businesses could generate through loans or internal revenue alone.
What a Stock Exchange Is
A stock exchange is the organized marketplace where stocks are listed, bought, and sold. In the U.S., the two biggest exchanges are the New York Stock Exchange (NYSE) and the NASDAQ. The NYSE is the oldest and largest by total market capitalization. The NASDAQ is known for being home to major technology companies like Apple, Amazon, and Microsoft.
Most trading today is fully electronic. When you place a buy order through a brokerage app, that order gets routed to an exchange and matched with a seller, often before you’ve moved your finger off the screen.
How Stock Prices Are Determined
Stock prices are set by supply and demand. If more people want to buy a stock than sell it, the price rises. If more people want to sell than buy, the price falls. At a basic level, that is the whole mechanism, but the reasons behind those buying and selling decisions are far more complex.
A stock’s price reflects what investors collectively believe a company is worth in the future, not just what it’s worth today. That means prices can shift dramatically based on earnings reports, economic data, new competitors, product launches, or even broad shifts in investor sentiment.
What Causes the Market to Move Up or Down
The market responds to a constant stream of new information. Some of the most common price drivers include:
- Earnings reports: When a company reports stronger or weaker profits than expected, its stock price typically moves sharply in response.
- Interest rates: When the Federal Reserve raises rates, borrowing becomes more expensive for businesses, which can compress future profit expectations and push stock prices lower.
- Economic indicators: Data on inflation, unemployment, and GDP growth all influence how optimistic or cautious investors feel about the broader economy.
- Geopolitical events: Wars, elections, trade disputes, and policy changes can introduce uncertainty that causes investors to buy or sell in large volumes.
- Investor psychology: Markets are driven by human behavior, and human behavior is not always rational. Fear and optimism can push prices further than fundamentals alone would justify.
The Major U.S. Stock Market Indexes
When a news anchor says “the market was up 300 points today,” they’re almost always referring to a specific stock market index, not the entire market. An index is a curated basket of stocks used to measure the overall performance of a particular segment of the market. Here are the three you’ll hear about most:
The Dow Jones Industrial Average (DJIA) tracks 30 large, well-established U.S. companies across multiple industries. It is the oldest major index, dating back to 1896, and is widely used as a general barometer of economic health, though it only represents a small slice of the market.
The S&P 500 tracks 500 of the largest publicly traded U.S. companies and is generally considered the most accurate representation of the overall U.S. stock market. Most professional investors use the S&P 500 as their primary benchmark. Historically, the S&P 500 has returned an average of approximately 10% per year before inflation, according to data from NYU Stern School of Business going back to 1928.
The NASDAQ Composite tracks more than 3,000 stocks listed on the NASDAQ exchange and is heavily weighted toward technology companies. When tech stocks soar or sell off, the NASDAQ tends to move more dramatically than the Dow or S&P 500.
Who Participates in the Stock Market
The stock market involves a much broader group of participants than most people realize. It’s not just Wall Street traders in front of multiple screens. The ecosystem includes several distinct types of investors.
Retail investors are everyday people who buy and sell stocks through brokerage accounts or retirement plans. If you have a 401(k) through your employer or a Roth IRA, there is a strong chance you are already a stock market participant, even if you’ve never consciously thought of yourself as one.
Institutional investors include mutual funds, pension funds, hedge funds, insurance companies, and university endowments. These entities manage enormous pools of money on behalf of individuals or organizations, and they account for a significant share of total daily trading volume. According to the SEC, institutional investors collectively own the majority of shares in most large publicly traded U.S. companies.
Market makers are firms that facilitate trading by standing ready to buy or sell a given stock at publicly quoted prices. They earn a small profit on the spread between what buyers pay and what sellers receive, and they play a key role in keeping markets liquid and efficient.
Why the Stock Market Exists
The stock market serves two fundamental purposes that benefit both businesses and individuals. On the business side, it gives companies a way to raise large amounts of money from a broad pool of investors.
With this money, they can hire people, build infrastructure, fund research, or expand operations. Without this mechanism, most companies would be limited to what they could borrow or earn on their own.
On the individual side, the stock market gives everyday people a way to build wealth by sharing in the growth of businesses they believe in. Historically, investing in a diversified basket of stocks has been one of the most effective long-term wealth-building strategies available to non-wealthy individuals.
The S&P 500’s historical average annual return of approximately 10% has significantly outpaced both inflation and savings account interest rates over most long-term periods.
Bull Markets and Bear Markets Explained
These two terms come up constantly in financial news, and the concepts behind them are straightforward. A bull market is a period in which stock prices are broadly rising. It’s typically defined as a gain of 20% or more from a recent low, sustained over at least two months. Bull markets are associated with economic expansion, strong corporate earnings, and high investor confidence.
A bear market is the opposite: a period of falling prices, usually defined as a decline of 20% or more from a recent high. Bear markets are often associated with economic slowdowns, recessions, or widespread investor fear.
Since 1928, the U.S. market has experienced roughly 27 bear markets, according to Investopedia’s analysis of historical data, with an average decline of about 35% and an average duration of about 9.6 months.
It is also worth knowing the term “correction,” which refers to a decline of 10% or more from a recent high. Corrections are more frequent than bear markets and are generally considered a normal part of market cycles rather than a sign of serious trouble.
How the Stock Market Compares to Other Investments
The stock market is not the only place people invest their money, and it helps to understand how it fits alongside other options.
Stocks vs. Bonds
Bonds are loans. When you buy a bond, you are lending money to a company or government in exchange for regular interest payments and the return of your principal at a set maturity date. Stocks represent ownership; bonds represent debt.
Bonds are generally considered lower risk than stocks, but they also offer lower potential returns. Many investors hold both to balance risk and reward in a single portfolio.
Stocks vs. Real Estate
Both stocks and real estate have historically been effective wealth-building vehicles, but they work differently. Real estate is tangible, can generate rental income, and benefits from leverage through mortgages.
Stocks are highly liquid. You can sell them in seconds, and they require no maintenance or management. Real estate investments typically require much more capital to get started and carry different tax implications.
Stocks vs. Cryptocurrency
Stocks represent ownership in real businesses with revenues, employees, and assets. Cryptocurrency is a digital asset class with a very different risk-and-reward profile. The stock market is heavily regulated by the SEC; the crypto market has far less regulatory oversight.
Cryptocurrency markets are also significantly more volatile than stock markets, with assets sometimes gaining or losing 50% or more of their value in a matter of weeks.
How Anyone Can Invest in the Stock Market
You do not need to be wealthy or have a finance degree to invest in the stock market. Platforms like Fidelity, Schwab, and Robinhood allow you to open a brokerage account with no minimum deposit. Many also offer fractional shares, meaning you can buy a piece of a high-priced stock like Amazon or Google for as little as $1.
The most widely recommended starting point for beginners is a low-cost index fund that tracks the S&P 500. Rather than picking individual stocks, an index fund spreads your money across hundreds of companies automatically.
You get broad market exposure, built-in diversification, and some of the lowest fees available. According to S&P Global’s SPIVA report, more than 90% of actively managed large-cap U.S. funds underperformed the S&P 500 over a 20-year period.
The most common account types for individual investors include:
- 401(k): An employer-sponsored retirement account that often includes matching contributions from your employer, which is essentially free money added to your investment.
- IRA (Individual Retirement Account): A personal retirement account that offers tax advantages. A traditional IRA gives you a tax deduction now; a Roth IRA lets your money grow tax-free.
- Taxable brokerage account: A standard investment account with no contribution limits and no tax advantages. Best used after you’ve maxed out tax-advantaged accounts.
Key Stock Market Terms Every Beginner Should Know
The financial world runs on jargon, and a little vocabulary goes a long way. Here is a quick reference for the terms you’ll encounter most often:
- Share: A single unit of ownership in a company.
- Dividend: A cash payment some companies make to shareholders from their profits, usually on a quarterly basis.
- Portfolio: The complete collection of all your investments across all accounts.
- Market capitalization: The total market value of all a company’s outstanding shares. Calculated by multiplying share price by total shares.
- Volatility: The degree to which a stock’s price fluctuates over time. High volatility means bigger swings in both directions.
- Liquidity: How quickly and easily an asset can be bought or sold without significantly affecting its price. Stocks are highly liquid; real estate is not.
- ETF (Exchange-Traded Fund): A basket of securities that trades on an exchange like a single stock. Most index funds are structured as ETFs.
- Bull market: A sustained period of rising stock prices, generally 20% or more above a recent low.
- Bear market: A sustained period of falling stock prices, generally 20% or more below a recent high.
Conclusion
The stock market is not a mystery reserved for finance professionals or the wealthy. At its core, it is a system that lets businesses raise money from the public and lets individuals grow their wealth by owning pieces of those businesses. Knowing the basics puts you in a far better position to make informed decisions about your own financial future.
If you take one thing away from this article, let it be this: the stock market rewards patience. The investors who build wealth over time are generally not the ones making bold predictions. They’re the ones who start early, invest consistently, and stay the course when things get uncomfortable. That strategy is available to anyone, regardless of income or background.