How the Stock Market Works

The stock market is simply a place where people buy and sell small pieces of companies, called shares or stocks. Understanding how it works removes most of the mystery and a lot of the fear.

What a share actually is

When a company wants to raise money, it can sell ownership to the public by listing on a stock exchange. Each share is a fraction of that ownership. Own a share of a company and you own a tiny part of its assets and future profits. If the company grows and becomes more valuable, your share is worth more. Some companies also pay out part of their profits as a dividend.

How prices are set

Prices are set continuously by buyers and sellers meeting on the exchange. Every trade is a buyer and a seller agreeing a price. When demand outweighs supply, the price ticks up; when sellers dominate, it falls. In the short term this is driven by news, emotion and expectations. In the long term, prices tend to track how much the underlying businesses actually earn.

What happens when you buy

You place an order through a broker, which routes it to the exchange and matches it with a seller. A market order buys immediately at the best available price; a limit order only fills at a price you set. Moments later you own the shares, held electronically in your account.

Key takeaways

• A share is part-ownership of a real company.
• Prices move on supply and demand: sentiment short term, earnings long term.
• You buy and sell through a broker, using market or limit orders.