The stock market is a constellation of exchanges where securities like stocks and bonds are bought and sold. In the United States, “the stock market” and “Wall Street” can refer to the entire world of securities trading—including stock exchanges where the shares of public companies are listed for sale and markets where other securities are traded.
How Does the Stock Market Work?
The stock market helps companies raise money to fund operations by selling shares of stock, and it creates and sustains wealth for individual investors.
Companies raise money on the stock market by selling ownership stakes to investors. These equity stakes are known as shares of stock. By listing shares for sale on the stock exchanges that make up the stock market, companies get access to the capital they need to operate and expand their businesses without having to take on debt. In exchange for the privilege of selling stock to the public, companies must disclose information and give shareholders a say in how their businesses are run.
Investors benefit by exchanging their money for shares on the stock market. As companies put that money to work growing and expanding their businesses, investors reap the benefits as their shares of stock become more valuable over time, leading to capital gains. In addition, companies pay dividends to their shareholders as their profits grow.
The performances of individual stocks vary widely over time but taken as a whole; the stock market has historically rewarded investors with average annual returns of around 10%, making it one of the most reliable ways of growing your money.
Stock Market vs. Stock Exchange
Although the terms are used interchangeably, the stock market is not the same as a stock exchange. Think of a stock exchange as a part of a whole—the stock market comprises many stock exchanges, such as the Nasdaq or New York Stock Exchange (NYSE) in the U.S.
When people talk about how the stock market is performing, they mean the thousands of public companies listed on multiple stock exchanges. And more generally, the stock market can encompass a broad universe of bonds, mutual funds, exchange-traded funds (ETFs), and other securities beyond just stocks.
What Is a Stock Market Index?
A stock market index tracks the performance of a group of stocks representing a particular industry or segment of the stock market, like the technology, energy, and transportation sectors. Often, one of three extensive indexes is used as shorthand to describe the performance of the U.S. stock market as a whole:
- Dow Jones Industrial Average (DJIA). The DJIA is made up of 30 blue-chip stocks of U.S. industrial companies.
- NYSE Composite Index. The NYSE Composite Index tracks the price movements of all common stocks listed on the New York Stock Exchange.
- S&P 500. The S&P 500 represents 500 of the largest companies in the U.S. economy.
Other Types of Markets
The stock market generally refers to markets and exchanges where equity shares and related securities are traded. Other types of financial assets have their markets.
- Over-the-Counter (OTC) Markets. OTC describes securities trading that takes place outside of major stock exchanges. OTC trades are primarily made directly between sellers and buyers, and prices may or may not be publicly available. Most bonds are traded OTC, and many stocks—including penny stocks—are also traded over the counter.
- Commodities Markets. Raw materials like steel, coal, and oil are traded on commodities markets. Around 50 major commodity markets worldwide facilitate trade in various commodities.
- Derivatives. Derivatives are financial contracts like options whose value is tied to an underlying asset. These are contractual bets about whether individual securities’ values will rise or fall. For experienced investors, derivatives can be highly lucrative ways to hedge their bets when investing, and they can be incredibly risky for beginners.
- Foreign Exchange Markets. Forex trading is a borderless, international market for exchanging currencies. Forex traders take advantage of the constantly fluctuating value of different currencies to make profits and help provide liquidity for international trade.
- Cryptocurrency. Bitcoin, Ethereum, and other cryptocurrencies are traded on specialized crypto exchanges.
How to Invest in the Stock Market
If you want to invest in the stock market, the process of getting started is more straightforward than you think:
- Decide what kind of account you want to open. From retirement savings to college savings, from short-term goals to long, there is an investment account for everything.
- Open a brokerage account. Once you’ve decided what kind of account you want, you’re ready to open an account at a brokerage provider. When choosing a company, consider its fees and available investment options.
- Deposit money. To get started, you need to make an initial deposit. You can also set up recurring deposits to automate your investments going forward.
- Choose your investments. Once your account is open, you can buy and sell securities. You can opt for individual stocks and bonds or mutual funds, index funds, and exchange-traded funds (ETFs) that contain hundreds of individual securities. Many experts recommend a diversified, fund-based approach to minimize the risk anyone bad investment loses you money.
- Purchase your investments. Once you’ve settled on what you want to buy, simply enter the ticker in the buy field and indicate how many shares you want.
