How the Stock Market Works

What is the stock market, in one paragraph?

For the stock market for beginners, start here: it is the network of exchanges where shares in companies are bought and sold, and where their prices are set by that trading.

Companies first sell shares to raise money, usually in an initial public offering. After that, the shares change hands between investors on an exchange, and the company itself is no longer involved in each trade. The price moves because buyers and sellers keep changing their view of what the business is worth, based on its profits, its prospects and the mood of the market as a whole.

What do you own when you buy a share?

A small, legally recognised slice of a real company.

That slice carries rights. If the company pays a dividend, you receive your share of it. You can usually vote at shareholder meetings. If the company is sold, you are paid for your shares. If it goes bankrupt, shareholders are paid last, after lenders and suppliers, which often means nothing at all.

This is the main difference from most crypto tokens. A token may give access to a service or a vote on a protocol, but it rarely gives any legal claim on profits. A share's price is anchored, loosely and sometimes very loosely, to the earnings of a business that analysts can study.

Where do shares trade, and when?

On regulated exchanges, each with fixed weekday hours in its own time zone.

Some brokers offer trading before and after these sessions, but with fewer participants, wider spreads and sharper moves. Outside all sessions, prices stand still until the next open.

How does a buy order become shares you own?

Your broker sends the order to the market, it is matched with a seller, and the trade settles a short time later. In the US that is one business day after the trade.

You choose an order type. A market order buys straight away at the best price available, which in a fast market may differ from the last price you saw. A limit order names the highest price you will pay and waits until it can be filled. A stop order becomes a market order once a trigger price is reached, and is often used to limit a loss.

After the match comes settlement: cash moves one way and the shares the other. US shares settle on T+1, one business day after the trade date, so a Monday purchase settles on Tuesday. Your broker then holds the shares for you, usually in a nominee account kept separate from its own money. That segregation is a big reason a regulated broker's failure is not normally the disaster that a crypto platform's collapse can be.

What is an index, and why does everyone quote one?

An index tracks a basket of shares so you can see how a market or a slice of it is doing with a single number.

• S&P 500: about 500 large US companies, weighted by the value of their freely traded shares.
• Dow Jones Industrial Average: 30 large US companies, weighted by share price rather than company size.
• Nasdaq Composite covers everything listed on Nasdaq, while the Nasdaq-100 is its 100 largest non-financial companies.
• FTSE 100 (London), DAX (40 German companies), Nikkei 225 (Tokyo, price-weighted), ASX 200, and India's Nifty 50 and Sensex.

Index funds and ETFs let investors buy a whole index in one purchase, spreading risk across many companies. Our page on how to read the stock market explains what an index move of so many points really means.

How do investors make or lose money on shares?

Through the change in price and through dividends, if the company pays them.

Dividends are never guaranteed; companies cut them when profits fall. Fees, taxes and currency conversion, when you buy shares listed abroad, reduce returns further. See the guide to trading fees.

Single shares, funds or ETFs: what is the difference?

A single share ties you to one company. A fund or exchange-traded fund (ETF) holds many, so one company's bad news does less damage.

An index fund aims to match an index such as the S&P 500 or FTSE 100 by holding its members in the same proportions. An ETF is a fund whose units trade on an exchange like a share, so you can buy and sell it through the day. Both charge an annual management fee, taken from the fund's value, which is usually small for plain index trackers and higher for actively managed or specialist funds. Funds spread company risk, but they do not remove market risk: when the whole market falls, a tracker falls with it.

What changes if you come from crypto?

• Hours matter. News at the weekend shows up as a gap at Monday's open, not as a gradual move.
• Moves are usually smaller for large companies, though individual shares can still halve or double.
• Custody is simpler. There are no private keys to guard, but you depend on the broker's regulation.
• Leverage is limited. UK and EU retail clients can use at most 5:1 on individual share CFDs.
• Rules differ by country. In the UK, a stocks and shares ISA shelters gains from tax up to the annual allowance, £20,000 for 2026/27. In the US, the old $25,000 pattern day trader minimum is being replaced: regulators approved a new intraday margin approach in April 2026, effective from June 2026.

How long do people usually hold shares?

There is no rule, but there are two broad approaches. Investors buy shares or funds to hold for years, accepting that prices will fall at times, and focus on what the businesses earn over the long run. Traders buy and sell over days or weeks, trying to profit from shorter price swings, and pay far more in spreads and fees along the way. Many beginners start as investors and are drawn into trading by the ease of apps. Decide which you are doing before you place an order, because the two call for different costs, time and nerves.

What mistakes do beginners make most often?

1. Putting most of the money into one or two companies, so a single bad result does serious damage.
2. Buying because a share has already risen a lot, and selling in a panic after it falls.
3. Ignoring costs such as currency conversion and frequent trading fees.
4. Using leverage or options before understanding plain share ownership.
5. Checking prices many times a day, which tends to encourage reactions to noise rather than to real changes in a business.
6. Forgetting that shares listed abroad also carry currency risk: a gain in the share can be wiped out by a move in the exchange rate.

Sources

• US Securities and Exchange Commission, T+1 settlement cycle
• US SEC approval of FINRA intraday margin rule replacing pattern day trader requirements (April 2026)
• HM Revenue and Customs, ISA allowances
• S&P Dow Jones Indices, FTSE Russell, Deutsche Börse and Nikkei index methodologies