What the stock market is and how trading happens

The stock market is a system where shares of companies are bought and sold between investors. When you buy a share, you own a small piece of that company. When you sell a share, you transfer that ownership to someone else. The price of each share changes throughout the day based on how many people want to buy it versus how many want to sell it.

Trading happens on exchanges — physical or electronic marketplaces where buyers and sellers meet. The two largest U.S. exchanges are the New York Stock Exchange (NYSE) and the NASDAQ. When you place an order to buy or sell a stock, it goes to one of these exchanges, where it is matched with someone on the other side of the trade. If you want to buy 100 shares of Apple and someone wants to sell 100 shares at the same price, the trade happens when ready.

The price you see quoted — say, $150 per share — is the price of the most recent trade. It is not a fixed price. The next trade might happen at $150.05 or $149.95 depending on whether more people want to buy or sell at that moment.

Key Takeaways

  • A stock represents ownership in a company, and the stock market is where those shares change hands between buyers and sellers.
  • Stock prices move based on supply and demand: more buyers than sellers pushes the price up, and more sellers than buyers pushes it down.
  • Trades happen on exchanges like the NYSE and NASDAQ, where buy and sell orders are matched electronically throughout the trading day.
  • The bid-ask spread — the gap between what buyers will pay and what sellers will accept — is the cost of trading, not a fee you see separately.

Why stock prices go up and down

Stock prices move because of the balance between buyers and sellers at any given moment. If a company announces strong earnings, more investors want to own it, so more people place buy orders than sell orders. With more demand than supply, the price rises. If the company announces disappointing news, more people want to sell than buy, and the price falls.

This happens in seconds. A news headline, an earnings report, a competitor's announcement, or even a tweet from the company's CEO can shift the balance. Investors are constantly reassessing what they think a company is worth based on new information. The stock price reflects the collective judgment of all the buyers and sellers at that moment.

Broader economic conditions also move stock prices. If interest rates rise, investors may sell stocks to buy bonds instead, pushing stock prices down across the market. If the economy is growing and unemployment is low, investors tend to be more confident and buy more stocks, pushing prices up. Individual stocks also move based on their industry: if oil prices fall, energy company stocks often fall too.

How you buy and sell stocks

To buy or sell stocks, you need a brokerage account. A broker is a company that holds your money and executes trades on your behalf. You open an account, deposit money, and then place orders through the broker's website or app. Common brokers include Fidelity, Charles Schwab, E*TRADE, and Robinhood.

When you place a buy order, you specify the stock symbol (like AAPL for Apple), the number of shares, and the type of order. A market order buys at the current market price when ready. A limit order lets you set a maximum price you will pay — the order only fills if the stock drops to that price or lower. Limit orders can take hours or days to fill, or may never fill if the price never reaches your limit.

Selling works the same way. You tell your broker which stock to sell, how many shares, and what type of order. Once the trade executes, the cash goes into your brokerage account. You can then withdraw it to your bank account, usually within one to three business days.

The bid-ask spread and trading costs

At any moment, there is a highest price a buyer is willing to pay (the bid) and a lowest price a seller is willing to accept (the ask). The difference between them is the bid-ask spread. If the bid is $100 and the ask is $100.10, the spread is $0.10 per share.

The spread is the cost of trading. When you buy, you pay the ask price (slightly higher). When you sell, you receive the bid price (slightly lower). You do not see this as a separate fee — it is built into the price. For large, popular stocks like Apple or Microsoft, the spread is often just a penny or two per share. For smaller, less-traded stocks, the spread can be much wider, sometimes 50 cents or more per share.

Most brokers no longer charge commissions on stock trades, so the bid-ask spread is your main trading cost. Some brokers also charge account fees or require minimum balances, so check the terms before opening an account.

Market hours and after-hours trading

The regular stock market trading day runs from 9:30 a.m. to 4:00 p.m. Eastern Time, Monday through Friday. Most trading volume happens during these hours, and prices are most liquid — meaning you can buy or sell quickly at a fair price.

Before the market opens (4:00 a.m. to 9:30 a.m.) and after it closes (4:00 p.m. to 8:00 p.m.), there is after-hours trading. Some brokers allow you to trade during these windows, but volume is much lower, spreads are wider, and prices can be more volatile. A stock might jump 5% on news released after hours, then move back down when the regular market opens and more traders enter.

The market is closed on weekends and federal holidays. If major news breaks on a Saturday, you cannot trade until Monday morning, so the price may gap up or down when the market opens.

How market indexes track overall performance

A stock market index is a collection of stocks chosen to represent the overall market or a sector of it. The S&P 500 tracks 500 large U.S. companies. The Dow Jones Industrial Average tracks 30 large companies. The NASDAQ Composite includes all stocks listed on the NASDAQ exchange, with a heavy weight toward technology companies.

When you hear "the market is up 2% today," that usually refers to one of these indexes. The index price is calculated by combining the prices of all the stocks in it, weighted by size or other factors. If the S&P 500 is up, it means the average large U.S. company stock has risen. If it is down, the average has fallen.

Indexes serve as benchmarks. If you own a mix of stocks and the S&P 500 is up 10% but your portfolio is up only 5%, you underperformed the index. If your portfolio is up 15%, you outperformed it. Many investors use indexes as a baseline to measure their own results.

The role of market makers and liquidity

Market makers are firms that buy and sell stocks constantly, holding inventory to may support there is always someone on the other side of a trade. When you want to sell 100 shares of a stock, a market maker may buy them from you when ready, even if there is no other buyer waiting. They profit from the bid-ask spread — they buy at the bid and sell at the ask.

Market makers create liquidity, meaning you can buy or sell quickly without waiting for a matching order. Without them, you might place a sell order and wait hours for a buyer to appear. For popular stocks, there are many market makers competing, so spreads are tight. For obscure stocks, there may be few market makers, spreads are wide, and it takes longer to fill orders.

Liquidity matters to you because it affects the price you get. If you need to sell 10,000 shares of a small stock, you may have to accept a lower price to move that volume quickly, or wait days to sell at a better price in smaller chunks.

Frequently Asked Questions

What does it mean when a stock "splits"?

A stock split divides existing shares into more shares at a lower price. If you own 100 shares at $300 each and the company does a 3-for-1 split, you now own 300 shares at $100 each. The total value is the same, but the lower price may attract more buyers. The company does not gain or lose value from a split — it is purely a change in how the shares are divided.

Can I lose more money than I invested in stocks?

If you buy stocks outright with your own money, the most you can lose is what you invested. If a company goes bankrupt and the stock goes to zero, you lose 100% of that investment, but you do not owe anything more. However, if you buy stocks on margin (borrowing money from your broker), you can lose more than your initial investment because you owe the borrowed amount back.

Why do some stocks pay dividends?

Some companies distribute a portion of their profits to shareholders as dividends, usually paid quarterly. A dividend might be $0.50 per share, so if you own 100 shares, you receive $50. Not all stocks pay dividends — growth companies often reinvest all profits back into the business. Dividend-paying stocks are common among mature, stable companies.

What is the difference between a stock and a bond?

A stock is ownership in a company. A bond is a loan you make to a company or government. When you buy a bond, you lend money and receive interest payments. Bonds are generally less volatile than stocks but also offer lower returns. Stocks can rise or fall sharply, but they have historically returned more over long periods.

How do I know what price to set for a limit order?

Look at the stock's recent price history and current bid-ask spread. If a stock is trading at $100 and you think it might dip, you could set a limit order at $99. Check the stock's 52-week high and low to understand its recent range. For a sell limit order, set it above the current ask price if you think the stock will rise. Remember that limit orders may never fill if the price does not reach your target.