How the Stock Market Works and What Happens When You Buy a Stock
What the stock market is
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. The stock market itself is not a single building or website — it is a network of exchanges, brokers, and dealers that match buyers with sellers and record the trades.
The largest stock exchanges in the United States are the New York Stock Exchange (NYSE) and the NASDAQ. Both operate during regular trading hours — roughly 9:30 a.m. to 4:00 p.m. Eastern time on weekdays — and both list thousands of companies. When you place an order to buy or sell a stock, your broker sends it to one of these exchanges, where it is matched with someone on the other side of the trade.
Stock prices move based on supply and demand. If more people want to buy a stock than sell it, the price goes up. If more people want to sell than buy, the price goes down. This happens throughout the trading day, which is why the same stock can have different prices at different times.
Key Takeaways
- A stock represents ownership in a company, and the stock market is where those shares are bought and sold between investors.
- Stock prices change throughout the trading day based on how many people want to buy or sell at any given moment.
- You need a brokerage account to buy stocks, and your broker handles the actual trade on an exchange like the NYSE or NASDAQ.
- Stocks are riskier than bonds or savings accounts because their value can fall, but they have historically returned more over long periods.
- Most individual investors buy stocks through mutual funds or ETFs rather than picking individual companies themselves.
How you buy and sell stocks
To buy a stock, you first open an account with a brokerage firm. The brokerage is the middleman — it holds your money, executes your trades, and keeps records of what you own. Common brokerages include Fidelity, Charles Schwab, E*TRADE, and Vanguard, though there are many others. Most brokerages let you open an account online in under an hour.
Once your account is funded, you place an order through the brokerage's website or app. You tell it which stock you want to buy (identified by a ticker symbol, like AAPL for Apple or MSFT for Microsoft), how many shares you want, and what type of order you want to place. A market order buys at the current price immediately. A limit order buys only if the price drops to a level you set. The brokerage sends your order to an exchange, where it is matched with a seller.
Selling works the same way in reverse. You place a sell order, the exchange matches it with a buyer, and the cash goes into your brokerage account. You can then withdraw the money or use it to buy something else.
What moves stock prices
Stock prices reflect what investors think a company is worth right now and what it might be worth in the future. When a company reports strong earnings, investors often bid the stock up because they expect future profits to be higher. When a company reports weak earnings or faces a lawsuit, investors often sell, pushing the price down.
Broader economic conditions also matter. If interest rates rise, investors may sell stocks and move money into bonds or savings accounts that now pay more. If the economy slows and people worry about a recession, stocks often fall across the board. If the economy is growing and companies are hiring, stocks often rise. News about a specific industry — like new regulations for banks or a recall for automakers — can move stocks in that sector.
Short-term price swings are often driven by emotion and momentum rather than changes in what a company is actually worth. This is why stock prices can be volatile day to day, even though the underlying business has not changed much.
The difference between stocks and other investments
Stocks are riskier than bonds or money market accounts because their value can fall sharply and stay down for months or years. If you buy a bond, you are lending money to a company or government, and they promise to pay you back with interest. If you buy a stock, you own a piece of the company, and there is no promise — the company could fail, or investors could simply decide the stock is worth less.
However, stocks have historically returned more over long periods. From 1926 to 2023, the average annual return of the S&P 500 (a group of 500 large U.S. companies) was roughly 10 percent, though that figure varies by decade and includes years with losses. Bonds have returned less but with smaller swings. Cash in a savings account is safe but returns very little.
This is why financial advisors often suggest that younger investors with longer time horizons hold more stocks, while older investors closer to retirement hold more bonds and cash. The longer you can wait out a downturn, the more you can afford to take the risk that stocks offer.
How most people actually own stocks
Most individual investors do not pick individual stocks themselves. Instead, they buy mutual funds or exchange-traded funds (ETFs) that hold dozens or hundreds of stocks. A mutual fund is a pool of money from many investors that a professional manager uses to buy a basket of stocks (or bonds, or a mix). An ETF is similar but trades on an exchange like a stock and usually tracks an index rather than being actively managed.
When you buy a mutual fund or ETF, you own a small piece of all the stocks inside it. This spreads your risk — if one company fails, it is a small dent in your overall holding. If you picked individual stocks yourself and one failed, you could lose much more. For this reason, mutual funds and ETFs are often a better choice for people who do not have time to research companies or who want to reduce risk through diversification.
You can also own stocks through a retirement account like a 401(k) or IRA. These accounts offer tax advantages, and many employers match contributions to a 401(k). The stocks inside these accounts work the same way — they rise and fall with the market — but the tax treatment is different.
What happens during a market downturn
Stock prices fall sometimes. A correction is a drop of 10 percent or more from recent highs. A bear market is a drop of 20 percent or more that lasts for months or longer. These happen regularly — there have been multiple bear markets in the past 25 years, including the 2008 financial crisis and the 2020 pandemic crash.
When the market falls, the temptation is to sell and move to cash to stop the losses. However, selling locks in the loss and means you miss the recovery. Historically, the market has recovered from every downturn, though the time it takes varies. The 2008 crash took about four years to recover. The 2020 crash recovered in about a year. If you have a long time horizon and do not need the money soon, staying invested through downturns has been the better choice.
This is why financial advisors emphasize having an emergency fund in cash before you invest in stocks. If you need the money within five years, stocks are probably too risky for that money. If you will not need it for ten years or more, the historical returns of stocks make them worth the short-term volatility.
How to start learning about stocks
If you are new to stocks, start by reading about how the market works and what different types of investments do. Most brokerages offer free educational resources on their websites. You can also read books like "The Intelligent Investor" by Benjamin Graham or "A Random Walk Down Wall Street" by Burton Malkiel, which explain how stocks work and how to think about risk.
Before you invest real money, consider opening a practice account or paper trading account where you can place fake trades and watch how they perform. This lets you learn without risking money. Many brokerages offer this feature.
Once you are ready to invest, start small. You do not need a large amount of money to open a brokerage account — many brokerages have no minimum. Consider starting with a low-cost index fund or ETF that tracks the overall market rather than trying to pick individual stocks. This gives you broad exposure to the market with less risk than picking individual companies.
Frequently Asked Questions
Do I need a lot of money to start buying stocks?
No. Most brokerages have no minimum account balance, and you can buy fractional shares of expensive stocks. For example, if a stock costs $500 per share, you can buy 0.1 shares for $50. This means you can start investing with whatever amount you have available.
Can I lose more money than I invested in a stock?
If you buy a stock outright, the most you can lose is what you paid for it — the stock can go to zero, but not below. However, if you borrow money to buy stocks (called buying on margin), you can lose more than your initial investment. Most beginners should avoid margin until they understand the risks.
How often should I check my stock prices?
If you are investing for the long term, checking prices daily or weekly can lead to emotional decisions. Many advisors suggest checking your portfolio once or twice a year and rebalancing if needed. If you are trading frequently, you will need to monitor prices more closely, but frequent trading usually costs more in fees and taxes than it gains.
What is the difference between a stock and a stock fund?
A stock is a single share of one company. A stock fund (mutual fund or ETF) holds many stocks in one package. When you buy a fund, you own a small piece of all the stocks inside it. Funds reduce risk through diversification but may charge fees for management.
Why do stock prices move so much in a single day?
Stock prices move based on supply and demand throughout the trading day. News, earnings reports, economic data, and investor sentiment can all shift how many people want to buy or sell at any moment. Short-term moves often reflect emotion rather than changes in what the company is actually worth.