The term “stock market” usually describes any place where you can buy, sell or trade shares of companies, also known as stocks. It also refers to indexes, or measurements, which track the prices of certain stocks.
While stock trading has been around for centuries—the New York Stock Exchange (NYSE) was established in 1792—the stock market has developed over the years to give investors a way to efficiently buy and sell stocks and track information about stock prices.
Some stock exchanges still have physical locations, but you can now buy stocks over the phone, online or by app.
For people who want to invest money, the stock market gives you a relatively straightforward path to do so, while also offering you agency oversight from the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) to help protect you against fraud and other risks.
In addition, publicly-traded companies, or companies that sell their stock to the public, are required to publish their financial statements. You can find those statements at SEC.gov.
How does the stock market work
The stock market allows you to buy stocks from public companies through online or physical stock exchanges or brokerages.
Some of the most popular U.S.-based exchanges are the NYSE and the National Association of Securities Dealers (NASDAQ), the latter of which focuses on stocks for technology companies.
When it comes to the listed price of a stock, the value is based on factors like the company’s performance and supply and demand. When a company performs well, the demand usually increases, and the stock price goes up.
How are stocks bought and sold
Stocks can be bought and sold in a variety of ways. In many cases, you first need to set up an account through a licensed brokerage platform, which you can do on your own or with the help of a professional broker.
Here are some of the ways you can buy stocks:
- Direct stock plan: If available, buy directly from the company you want to invest in. For some companies, this option is available exclusively to employees or shareholders.
- Initial Public Offering (IPO): A company’s stock can be purchased when it first makes its shares available to the public through an IPO. For IPOs, shares are usually sold by investment banks.
- Stock exchanges: After the IPO, stocks can be bought and sold on the secondary market through stock exchanges such as the NYSE or NASDAQ.
- Stockbrokers: You can make purchases through stockbrokers who work on behalf of a financial institution or individual investors for a commission. You may pay a fee based on the number of shares you buy and a fee of around $5 per trade.
- Brokerages and trading platforms: The most popular method of buying stocks is through brokerages and trading platforms. Depending on the option you choose, you can buy directly through the platform or with the assistance of an advisor.
The role of brokers and trading platforms
Brokerages are financial institutions that act as middlemen between stock sellers and buyers. When you want to buy, sell or trade, a brokerage can make it happen almost instantly, of course, with a fee for each trade.
But amongst brokerages, you can generally choose one of two options:
- Full-service firm: A firm that assigns you a broker or an advisor who “actively manages” your account by taking your orders and giving you input and advice. These high-touch services are usually the priciest option, and brokers sometimes receive incentives to give you advice that’s not in your best interest. Investor.gov offers tips on how to screen a broker.
- Discount brokerage: A platform that gives you direct access to trading. With these firms, you choose and manage your investments without input from a broker.
It might seem like hiring an advisor would lead to more successful investing, but that’s not necessarily true. Historically, investors who put their money into a mutual fund that follows an index like the S&P 500 often outperform actively managed funds.
Why should you care about the stock market?
If you’re working to improve your finances or save money for retirement, you’ll likely need to learn some stock market basics in the near future.
Here are some of the reasons it’s worth picking up on investment tips and learning stock market terms sooner rather than later.
Beat inflation
Like it or not, the economy can significantly impact your net worth. That’s because as inflation rises, it slowly diminishes the value of your money.
One of the few ways to maintain, and even increase your spending power, is to earn a rate of return on your investments that’s higher than inflation.
Read more: 8 Small Ways to Stretch Your Budget During Inflation
Plan for retirement
The stock market can play a big role in your retirement planning. For example, pension funds invest an average of 24% of their funds into stocks.
With self-directed 401(k)s, you can choose to invest as much as 100% in stocks, although investors average closer to 70%. As the stock market fluctuates, it can have a major impact on the value of your retirement savings.
Influence economic growth
When you buy stocks, you can invest in economic growth that aligns with your values. You can use your money to support a company you believe in, for example, or even invest in an industry that you want to see thrive.
Remember to diversify
Investing in the stock market can feel like gambling: you bet on what will happen to a company or even a whole industry in the future.
Sure, there are no guarantees your investment will pay off, but unlike gambling, there are ways to safeguard yourself against big losses.
One way to reduce your risk is to diversify or spread your money across a diverse mix of investments.
An easy way to do that is by investing in a mutual fund or an exchange-traded fund (ETFs) since both spread your money across a mix of stocks. If you have a 401(k), there’s a chance you’re already doing this.
Additionally, you can reduce your risk by taking a long-term perspective. That means instead of making large stock purchases based on news headlines or panic-selling as soon as your stock value drops, you invest manageable amounts at regular intervals over a period of decades.
This article is for informational purposes only. The content is impersonal and is not directed to the specific investment objectives, financial situation or investment needs of any particular person, and should not be considered investment advice. This information is not intended to be, nor should you interpret it to be, a prediction of how any particular security or investment strategy will actually perform. You should consult your financial or investment advisor if you have any questions or need additional information. You should always carefully consider investments in any security, and you should be comfortable with your understanding of the investment prior to investing.
Prosper’s borrower payment dependent notes (“Notes”) are offered pursuant to a Prospectus filed with the SEC.