What Is the Stock Market In Simple Terms?

The stock market is simply a place where investors come together to buy and sell investments. Investments being another word for stocks, assets, and funds, which are essentially shares of ownership in a public company.

The stock market is essentially open to everyone, meaning you don’t need to become a professional investor to partake in buying and selling. However, there’s more to the stock market than simply buying and selling.

Here’s what you need to know…

What exactly is the stock market?

A “stock market” refers to one or more in the collection of major indexes, such as the Dow Jones Industrial Average (DJIA) and the S&P 500. These indexes serve as a representation of the stock market as a whole. However, since it’s difficult to track each individual stock, both indexes only contain a section of the stock market which they analyze the performance of to create that representation.

Therefore, when you see a report of the stock market moving lower, or that the stock market closed up or down for the day, it’s referring to the movement that the stock market indexes for the day. What this means is that the stocks within these indexes have either lost or gained value as a whole.

The investors—both professional and non-professional—buy and sell stocks under a governed set of rules and regulations in hopes of turning a profit through stock price movement.

The stock market originated as a viable business model by the Dutch in the late 16th century. The purpose behind it was to raise capital by selling stock and paying dividends to shareholders. You can read more about stock market history here.

The terms “stock exchange” and “stock market” are often used interchangeably. Although they’re very similar, the term stock market is actually a subset of the stock exchange. The stock exchange refers to the physical—or virtual—space where the stocks are being traded.

For example, you’ve likely heard of the New York Stock Exchange (NYSE) and Nasdaq, which are listed and highly regulated institutions set up for trading.

Stock exchanges also work like an auction house, only more like a blind auction house as the person on the other end of the trade is kept anonymous.

What is a stock exchange and how does it work?

The stock market essentially works through a network of exchanges, similar to an auction house. Publicly traded companies list their stock shares via an initial public offering (IPO) process.

Investors can then purchase those shares, which allows the company to use that money to grow its business. From there, investors can buy and sell the stocks among themselves, and the stock market exchange tracks their levels of supply and demand.

Supply and demand are critical because it determines the stock price securities—which are the levels investors and traders are willing to buy and sell.

Buyers can offer a bid, which is represented by a bid-ask spread, or they can trade. To trade, the buyer must increase his stock price or the seller must decrease theirs—but these prices are usually calculated by trading software.

What are the different types of stocks?

There are several types of stock categories including blue chip, speculative, growth, value, income, penny, and cyclical stocks. You can read more about the different stocks here.

The stock market can become a bit overwhelming for those who know little about it. However, once you break it down into buying, trading, and selling, it becomes a much easier concept to grasp!