When people talk about the stock market, it can sound like they’re talking in a different language. But understanding a little bit about how it works can make the idea of investing less intimidating.
In a nutshell, the stock market allows anyone to buy and sell fractional ownership in publicly traded companies. It distributes control of some of the world’s largest companies among hundreds of millions of individual investors, and their buying and selling decisions determine how those companies are valued.
If there are more buyers than sellers, the price of a stock goes up; otherwise, it falls. This is a result of the laws of supply and demand, and it’s why prices on the stock market rise and fall constantly.
To facilitate this buying and selling, the stock market has exchanges that connect potential investors with brokers who can execute trades for them almost instantly. Each exchange sets a number called the bid and ask, which represent how much it will take to buy or sell a share at that moment. Buyers and sellers can negotiate the price in many ways, from in-person haggling to phone conversations to today’s largely digital trades handled by powerful software that maximizes fairness for both sides.
While you can invest in individual stocks, a more popular option is to purchase shares of mutual funds or exchange-traded funds (ETFs) that hold diversified mixes of hundreds of different public companies already. This way, you can benefit from the ups and downs of the entire market without the risk of researching every company yourself.