What Is the Stock Market?

The stock market is a collection of exchanges through which equity shares of public companies are issued, bought and sold.

The role of the stock market is to provide a way for companies to raise capital by selling ownership shares to public investors. At the same time, the stock market allows private investors to buy shares of stock in public companies and become part owners of their businesses. The aggregate value of the entire stock market is often tracked and reported via market indexes, such as the Dow Jones Industrial Average and the S&P 500 index.

When a private company wishes to become public, it typically completes an initial public offering, or IPO. During the IPO process, the company sells shares of stock to public investors to raise the money it needs to pay off debt or invest in its business. Once the IPO is complete, these shares of stock begin trading on one or more of the stock exchanges that make up the stock market.

Public investors can track the real-time market price of a stock via monitoring its ticker symbol, typically an abbreviation of no more than five letters representing a particular company’s stock.

Investors buy shares of stock in the hopes that the company selling those shares will grow to become more valuable over time, thereby increasing the price of each share of stock. Stock prices are determined by the economic law of supply and demand, and their prices often fluctuate daily based on changes in investor demand.

Public companies can also issue more shares of stock after they have completed an IPO via secondary offerings, or they can use the company’s excess cash flow to buy back shares of stock from the public market. Secondary offerings are considered dilutive to investors because issuing additional shares of stock reduces the ownership stake each share represents.

One of the easiest ways to begin investing in the stock market is to open an online investing account. Once you have transferred funds to the investing account, you can immediately begin buying and selling stocks. Many discount brokerage accounts offer zero-commission stock trading and no account balance minimums, so you can start buying shares of stock with any amount of money.

Investors who want to take a hands-on approach to the stock market can pick and choose individual stocks based on their personal preferences. Investors who would prefer assistance can utilize a robo advisor or meet with a human financial advisor to determine an appropriate investment plan.

The global stock market is made up of different exchanges centered in major financial hubs around the world. The largest exchange is the New York Stock Exchange, or NYSE, which is located on Wall Street in New York City. The Nasdaq in New York, the Shanghai Stock Exchange in China, Euronext in Europe and Japan Exchange Group in Tokyo are other major global stock exchanges.

Investors place orders to buy or sell stocks through a broker, such as Charles Schwab, Fidelity or Robinhood. The brokers typically relay those orders to an exchange, where a market maker fills the order. Market makers are usually large banks or institutions that provide liquidity to the stock market. Large market makers include Deutsche Bank, Morgan Stanley and Citadel Securities.

The strength of the stock market loosely reflects the strength of the underlying economy and goes through cycles. Economic cycles have historically lasted from two years to 10 years each. Because the stock market is a leading economic indicator, it tends to reflect underlying economic changes about six to 12 months before they are reflected in the economic data.

Extended periods in which the stock market rises without any large drops are called bull markets. Stock market bubbles can occur at the end of extended bull markets. A stock market decline of at least 20% from recent highs is considered a bear market. The best time to invest in the stock market is at the end of a bear market when investor sentiment is at its most pessimistic point. The best time to sell stocks is at the end of a bull market when investor sentiment is at its most optimistic point.

The stock market can be extremely volatile on a year-to-year or month-to-month basis, but its long-term performance has been remarkably strong and consistent over time. The S&P 500’s rolling 30-year average annual return has stayed between around 8% and 15% dating back to 1926. From 1926 to 1956, the S&P 500 averaged a 10.7% annual return. From 1956 to 1986, the average return was 9.6%. From 1986 to 2016, the average annual return was 10%. Not only are these stock market returns remarkably consistent, but they are also higher than the historical returns of other asset classes, such as gold, U.S. Treasury bonds and real estate.

Stock market returns have historically been consistent and strong over the long term, making stocks a great way for investors to accumulate and grow wealth for retirement or other long-term financial goals. The stock market can also help investors protect their wealth from the negative impact of taxes and inflation. The stock market can be a reliable source of income for investors if they own stocks that pay dividends or other special distributions. Finally, it is easy for the average person to begin investing in the stock market, and it doesn’t require much money to start.

While diversification provides investors with a degree of safety, individual companies regularly become insolvent and go bankrupt. That process often leads to the stock’s share price dropping to zero. Unfortunately, common stockholders are typically last on the priority list when a bankrupt company liquidates its assets to pay off its debts and investors. Investing in the stock market can be an emotional experience, especially during bear markets or market crashes. Finally, the stock market can experience extreme price fluctuations in the short and medium term, making it relatively risky for investors approaching retirement age or those who may need to liquidate their holdings on short notice.

The first modern stock exchange was created in Amsterdam in 1611, and investors could initially only buy and sell shares of the Dutch East India Company. The first U.S. stock market was the Philadelphia Stock Exchange, which was founded in 1790. The New York Stock and Exchange Board, the precursor to the NYSE, was formally constituted in 1817. In 1971, the National Association of Securities Dealers Automated Quotations, otherwise known as Nasdaq, was launched. The Nasdaq was groundbreaking because it allowed investors to buy and sell stocks digitally on a network of computers rather than in person on a trading floor.