Discover what the stock market is, how it works, and read some guidance on where you can further grow your knowledge of investing.
Buying, selling, shareholders, trading, and, of course, profit – these are all phrases that come up when we talk about the stock market – but what do they actually mean? And how does the stock market actually work?
The stock market is becoming an increasingly popular talking point in the realm of business and management and beyond. In this post, we’re going to learn all about the stock market. We’ll take a closer look at what the stock market is and what types of stocks are available to trade, to help you understand key factors about how investing in stocks works.
Explaining the stock market
The stock market is the global system in which people can buy and sell stocks or shares in companies. A ‘share’ is used to describe the ownership of one part of a company, whereas the term ‘stocks’ refers to the more general ownership of shares across multiple companies.
In the most basic of definitions, the stock market is all about buying and selling shares at the right time, with the aim of making a profit. Depending on the price at which stocks are bought and sold, you can make or lose money.
Put simply, it’s all about the value of the company at a given time. If the value of a company grows, the value of its stocks or shares grows. On the other side, if the value of a company goes down, the value of its stocks or shares declines.
The stock market is accessible to anyone who is willing to invest – a 2022 Gallup poll reports that 58% of Americans own stocks. If you’re looking to learn the basics of stock market investing, check out Stock Market Investing for Beginners.
What is a stock exchange?
The stock market isn’t one central market. It’s made up of numerous sub-spaces called stock exchanges. While some physical spaces still exist where you can buy and sell stocks, most stock market activity takes place online.
There are 60 major global stock exchanges, and the top 16 are called the $1 Trillion Club. Stocks traded in these top 16 represent 87% of the global market. The US has the largest stock market share (at almost 60%), followed by Japan and the UK.
When they ‘go public’ and enter the stock market, companies will list their stocks in a stock exchange, such as the New York Stock Exchange or The Nasdaq (both of which are in the $1 Trillion Club).
Not just any company is eligible to enter the stock market – each stock exchange has requirements that companies must meet in order to list their stocks, such as minimum share price and a minimum market value.
When is the stock market open?
The hours of operation for each stock exchange are based on the local time and location. For example, the New York Stock Exchange is open Monday to Friday, 9:30 am – 4:00 pm local time.
What are stocks?
Stocks are like little pieces of a company – rather than keeping the ownership of the company limited to private shareholders, public companies are open to anyone to purchase shares.
Put simply, people can buy a slice (a stock or share) of a public company – this money can be used by the company to invest back into growth. In exchange, the shareholders will profit if the value of the company goes up.
Types of stocks
There are thousands of public companies and stock options open for public trading. The biggest ones that you’ve probably heard of include tech companies like Apple, Microsoft, and Amazon.
According to IBISWorld, the biggest industries in the US are hospitals, health and medical insurance, commercial banking, drug/cosmetic/toiletry wholesale, new cars, life insurance, and pharmaceuticals – and the list goes on.
All of these industries are full of individual companies that are open for trading on the stock market.
Mutual funds and exchange-traded funds (EFTs)
Mutual funds and EFTs consist of multiple stocks (and sometimes other types of investments, such as bonds or securities) that are bundled together into a sort of investment ‘package’.
Rather than (or in addition to) investing in individual stocks, many people invest in mutual funds and EFTs, which is a way to diversify your investments and, in theory, manage overall risk and return.
If this is starting to sound a little bit complicated, don’t worry – all of these aspects factor into financial literacy, which takes some time and dedication to understand.
We’ve covered the basics here, but if you’re interested in learning more about personal finance and growing wealth over time, take a look at our Principles of Wealth Management course by the Hanken School of Economics.
What influences stock prices?
The value of stocks is based on many different factors. One of the key concepts is supply and demand: how many stocks are available and how many people want to buy them?
The demand aspect is where it can get complicated (and potentially risky). Many factors affect stock prices – some are predictable, and others are unpredictable.
Stock values are constantly changing, sometimes fluctuating slightly and sometimes dramatically. Some of the things that affect stock value include:
- Financial health of the company – market share and value and public financial results
- Trends and behaviour – how the stock performs over a period of time in terms of stability or volatility
- Politics – major political decisions and elections that may affect the economy
- Economic conditions – the current economic climate (both nationally and globally)
- Industry conditions – activity within the company’s industry that suggests growth or decline
- Company activity – activity within the company that suggests growth or decline
- World events – anything from geopolitical to geographical events that may impact the global economy (natural disasters, pandemics, war, etc.)
To get a more intimate understanding of the ins and outs of what makes a company valuable in the eyes of the stock market, check out the Fundamentals of Corporate Finance.
How can you make (or lose) money in the stock market?
You might have heard the cliché stock market advice: buy low, sell high. Of course, it’s not always that simple, but it does ring true when we think about how to make money – or lose money – in the world of the stock market.
To make money, you’ll need to buy shares at a set price and wait until the company – and therefore your shares – goes up in value. When you feel your shares have peaked, or if you need to liquidate your shares for any reason, you can sell them and make a profit. (Keep in mind that you’ll also have to pay tax on this profit.)
On the other side, you may buy shares and watch the value go down. If you decide to sell your shares at a point in time when the value is lower than it was when you originally purchased them, you’ll lose money.
There are many factors to consider when you’re deciding when and what to buy and sell. You can learn more about financial viability and decision-making in Coventry University’s How to Make Better Capital Investment Decisions and Recognise Investment Opportunities course.
How can you start investing in the stock market?
There are many different avenues into the stock market, depending on your level of comfort and understanding, as well as how much you want to invest. Here, we’ve outlined the main channels for trading.
Through a brokerage
You are in control of what stocks you want to buy/sell and the broker carries out the transactions on your behalf. You may pay a flat fee or commission per stock.
Through a financial advisor
This can be an actual human or a robo-adviser. You’ll answer questions about your financial status and goals, including income, assets, how much risk you are comfortable with, and an ideal returns timeline.
The advisor or the system will decide which investments to make on your behalf, within the parameters you set up (which means you won’t be able to pick and choose individual stocks).
Through a retirement or long-term savings account
This typically takes place through your bank or another financial institution. You’ll put savings into an account, which will then be invested on your behalf. Usually, your savings will be put into mutual funds or EFTs, but some plans allow for individual stock purchases.
What should you do before investing in the stock market?
As with any big financial decision, there are many things to consider before investing in the stock market. It’s important to understand the risks, what you stand to lose, and the limits of your financial scope.
Of course, education is the best place to start. SOAS University of London’s Risk Management in the Global Economy course is a great introduction to financial markets and provides a good foundation of knowledge for assessing your own risks and returns in the stock market.
The more you learn, the more questions you’ll have – and that’s a good thing. The best way to prepare yourself to make smart decisions in the stock market is to have a comprehensive understanding of the moving parts within it.
For more information on priming yourself to grow your wealth, check out five online courses to improve your personal finance skills.