A stock is a small piece of a company that you can buy. When you own a stock, you’re called a shareholder, and that means you own part of that company.

For example, if you buy one share of a company like Apple, you own a tiny part of Apple. You don’t get a say in how the company is run unless you own a large number of shares, but you do get to share in the company’s success. If Apple grows and earns more money, your stock could become more valuable. Some companies even pay their shareholders part of their profits in the form of dividends.

The stock market is a system that allows people to buy and sell ownership in companies. These pieces of ownership are called “stocks,” and the market makes it possible for investors to trade them easily.

Think of the stock market like a giant marketplace or a digital store where buyers and sellers come together. Instead of trading goods like fruit or clothing, people are trading pieces of companies.

Most stock trading doesn’t involve the company itself. Instead, it happens between investors. For example, if you want to buy stock in Microsoft, you’re not buying it directly from Microsoft. You’re buying it from another person or institution who already owns the stock and is willing to sell it. The market helps connect your buy order with that seller’s offer.

This is possible thanks to stock exchanges like the New York Stock Exchange (NYSE) or the NASDAQ. These are official places—some physical, some entirely digital—where trades are processed and recorded.

Thanks to technology, you don’t have to be on Wall Street or use a personal broker to make trades. Most people now use online platforms like Fidelity, Robinhood, or Schwab. You can log in, choose a company, click “buy,” and become a shareholder in seconds.

In simple terms, the stock market works like a matchmaker. It matches people who want to buy stocks with people who want to sell them, and it helps everyone trade fairly and quickly.

Stock prices are based on a simple concept: supply and demand. But even though the idea is simple, the way it works can seem a little tricky at first.

At any moment during the trading day, some investors want to buy a stock while others want to sell it. The price of that stock is decided by what buyers are willing to pay and what sellers are willing to accept.

There are two key terms to understand:

The actual price at which the stock is sold is usually somewhere between the bid and the ask. The difference between these two prices is called the spread. The smaller the spread, the more active and “liquid” the stock is, meaning it’s easier to buy and sell quickly.

Example:

Let’s say someone wants to buy shares of a company at $50 (the bid), and someone else is willing to sell at $51 (the ask). If they agree on a price of $50.50, that becomes the current market price.

Prices move up and down all the time because people are constantly changing their opinions about what a stock is worth. If something positive happens—like the company announces strong earnings or launches a new product—more people may want to buy the stock. This increased demand pushes the price up. On the other hand, if bad news comes out—like falling profits or negative economic data—more people might want to sell, which pushes the price down.

External factors can also affect stock prices, such as:

In this way, stock prices are constantly adjusting to reflect how people feel about the company’s current performance and its future potential.

In the stock market, buying and selling happens quickly—often in just seconds. But what if you want to buy a stock and no one is selling it right away? Or what if someone wants to sell their shares, but there’s no buyer at that exact moment? That’s where

A market maker is a person or company that helps keep the market running smoothly. They do this by being ready to buy or sell stocks at any time, even if there isn’t a matching buyer or seller right then.

Market makers are like middlemen. They stand in between buyers and sellers to make sure trades can always go through.

How It Works:

This process creates something called liquidity, which means there’s always someone to trade with. Because of this, you don’t have to wait to sell your stock or worry that there’s no one on the other side of the trade.

Example:

Let’s say you want to sell 10 shares of a company for $20 each. There may not be a buyer waiting at that exact second. A market maker will buy your shares right away at the best available price. Then later, they’ll sell those shares to someone else. You get your money fast, and the market keeps moving.

The difference between the market maker’s buy price (bid) and sell price (ask) is where they make a profit. This gap is called the spread.

Without market makers, the stock market would be slower and less reliable. Thanks to them, you can trade stocks easily and quickly during normal market hours.

Buying a stock might seem as simple as pressing a button—but behind the scenes, several steps happen to make that trade go through. Let’s break it down.

To buy or sell stocks, you need to go through a broker. A broker is a company or platform that’s allowed to trade stocks on your behalf. In the past, brokers were often real people you had to call. Today, most brokers are online platforms like Fidelity, Charles Schwab, Robinhood, or E*TRADE.

Step-by-Step Example: Buying a Stock

This process works the same way whether you’re buying one share or hundreds. And thanks to technology and market makers, trades happen fast—even if millions of people are buying and selling at the same time.

How Does a Stock Index Track the Stock Market?

When people talk about “the stock market” being up or down, they’re often referring to something called a stock index. A stock index is a tool that helps measure how a group of stocks is performing. It gives you a quick way to see if the market, or a part of it, is going up or down.

Think of a stock index like a scoreboard in a sports game. It doesn’t show every detail of every player, but it gives you a good idea of how the team is doing overall.

A stock index is made up of many different stocks grouped together. It tracks their combined performance and reports it as a single number. That number moves up and down depending on how the stocks in the group are doing.

Here are some of the most well-known stock indexes in the United States:

Why Are Indexes Useful?

Indexes help investors understand trends in the stock market. If the S&P 500 is rising, it usually means most large companies are doing well. If it’s falling, the opposite may be true.

Investors also use indexes to compare how their own investments are doing. For example, if your portfolio grew by 6% this year, and the S&P 500 rose by 10%, your investments underperformed the market. If your portfolio grew by 12%, you “beat the market.”

Important Note

Just because the market (or index) is going up doesn’t mean every stock is rising. A stock index shows the average performance of a group, not the results of each individual stock. One company’s stock might be falling even while the index goes up, and vice versa.

Many people use the terms “stock market,” “stock exchange,” and “stock index” as if they mean the same thing. But while they’re closely related, each one plays a different role in the world of investing. Understanding these differences can help you speak more confidently about how investing works.

The stock market is the big picture. It’s the entire system where people buy and sell pieces of public companies (stocks). When someone says, “I’m investing in the stock market,” they mean they’re buying shares of companies through this system.

The stock market includes:

Think of the stock market like the world of sports—it includes all the leagues, teams, players, and fans.

A stock exchange is the specific place (either physical or digital) where trades happen. It’s like the stadium where the game is played.

Some of the biggest stock exchanges in the U.S. are:

Each exchange has rules about which companies can be listed. For example, companies need to meet certain size and financial requirements to be traded on the NYSE.

A stock index is a tool used to measure how a group of stocks is performing. It doesn’t involve actual trading. Instead, it gives investors a snapshot of what’s happening in a part of the market.

As explained in the previous section, indexes like the S&P 500, Dow Jones, and NASDAQ Composite are often used to track the overall performance of the market or specific sectors.

A Quick Comparison

Understanding how the stock market works is one of the first steps toward becoming a confident and informed investor. While the system may seem complicated at first, the basic ideas are actually pretty straightforward.

At its core, the stock market is a place where people buy and sell ownership in companies. These ownership pieces—called stocks—allow individuals to invest in the growth and success of businesses they believe in. When you buy a stock, you’re not just making a purchase—you’re becoming a part-owner of that company.

Stock prices change based on supply and demand. If more people want to buy a stock, its price goes up. If more people want to sell, the price goes down. These changes happen quickly and often, but they’re based on simple human behavior—what investors think a company is worth and what they expect to happen in the future.

Market makers and stock exchanges work behind the scenes to make sure trades happen fast and fairly. Thanks to these systems, you can buy or sell stocks in just seconds during normal market hours.

Indexes, like the S&P 500 or the Dow Jones, help track how groups of stocks are performing. They give investors a quick way to measure how well the market—or parts of it—is doing.

Whether you're investing for retirement, saving for a big purchase, or simply learning how the system works, knowing these basics gives you a strong foundation. With this knowledge, you can start making smart, informed decisions with your money.