What is the stock market and how does it work?

What is the stock market?

The stock market is a network of exchanges where people buy and sell shares of publicly listed companies. Think of it as a giant marketplace where, instead of fruit or clothes, the items being exchanged are shares. 

These shares represent partial ownership in the companies. For example, if you buy a share of Microsoft, you own a small stake in that business.

Companies use the stock market to raise capital by selling shares to the public through what is called an Initial Public Offering (IPO). Investors, on the other hand, can earn returns either by selling their shares again (at a higher price than what they paid) or by receiving dividends.

Exchanges like the New York Stock Exchange (NYSE) and NASDAQ provide the infrastructure for these transactions, efficiently matching buyers and sellers. This efficiency creates something called liquidity, which enables investors to quickly buy or sell shares.

Simply put, the stock market connects companies looking for funds to grow with investors looking to build their wealth. It plays a very important role in economic growth, enabling individuals to participate in the financial success of businesses.

How does the stock market work exactly?

The stock market works through a system of buyers, sellers and ‘middlemen’ operating on regulated exchanges. When an investor wants to buy a share, they typically place an order through a brokerage platform, like ours.

Let’s break it down:

1. Buying and selling: Investors place buy or sell orders for specific stocks. These orders are routed through brokers to a stock exchange.
2. Stock exchanges: Major exchanges like NYSE or NASDAQ facilitate these trades by matching buy and sell orders. This matching happens almost instantly.
3. Trading platforms and brokers: Platforms like Crypto.com act as intermediaries, enabling investors like you to access the market easily. Many brokers offer commission-free trades depending on the service.
4. Order types: Investors can place market orders (which means buying at the current price) or limit orders (buying only at a specific price). This gives you more flexibility based on your strategy.
5. Price changes: Stock prices go up or down due to supply and demand. When more people want to buy a stock, its price generally rises. When more want to sell, it typically drops.
6. Trade settlement: After a trade is made, it is confirmed and ‘settled’. The shares move from seller to buyer and funds move in the opposite direction. Stock trades settle the following business day, unlike crypto trades, where funds are exchanged for crypto instantly. 

In other words, the stock market is a high-speed marketplace where investors use brokers to access exchanges and trade shares. Platforms like ours streamline this process, making it quite popular among beginners.

Learn how to buy stocks

Who participates in the stock market? 

There are a few key players in the stock market, each with different roles and objectives:

1. Individual investors: These are everyday people, like you, who buy stocks to grow their savings or plan for future goals like retirement. They often use retail brokers or apps like Crypto.com.
2. Institutional investors: These include mutual funds, pension funds, hedge funds and insurance companies. They manage large pools of money and trade in high volumes.
3. Companies: Businesses can issue shares to raise capital. When a company goes public, it sells shares through an IPO, which gives it access to funding while giving investors something to buy.
4. Brokers: Brokers are the ‘middlemen’ who connect investors to exchanges. Some offer full-service advice, while others (like online apps) provide self-directed tools.
5. Stock exchanges: These are the venues where trading takes place, such as the NYSE and NASDAQ. They ensure fair and transparent transactions, and keep things orderly.
6. Regulators: Bodies like the US Securities and Exchange Commission (SEC) oversee the market. Their job is to protect investors, maintain fair markets and enforce the rules.
7. Market makers: These are firms or individuals who make sure there’s enough liquidity in the market by always offering to buy and sell stocks at certain prices.

Explore the Crypto.com App

Important stock market terms you need to know 

Understanding stock market terminology can help you feel more confident as an investor. Here are some of the most important terms to know:

• Stock vs share: These words are often used interchangeably, but there’s a subtle difference. Stock refers more broadly to ownership in one or more companies. A share, on the other hand, is a specific unit of ownership in a particular company.
  
• Dividend: A portion of a company’s profit paid out to shareholders, usually quarterly. Note that not all companies pay dividends.
  
• IPO: This refers to the first time a company sells shares to the public. This process makes the company a publicly listed company (PLC).
  
• Index: A basket of stocks used to represent a certain portion of the market. For example, the S&P 500 lists the top 500 large-cap companies listed in the US.
  
• Market capitalization: The total value of a company's listed shares, calculated by multiplying the share price by the number of shares. This is called market cap for short.
  
• Bull market: A market condition where prices are rising or expected to rise.
  
• Bear market: A market condition where prices are falling or expected to fall.
  
• Volume: The number of shares traded in any given period. It’s measured on a stock chart and high volume often indicates strong investor interest.
  
• Portfolio: A collection of different investments held by either an individual or institution.
  
• Volatility: This refers to how much a stock’s price moves up and down. High volatility means prices can swing significantly – either rising or falling quickly – while low volatility indicates more stable prices with smaller movements.

Why is the stock market important?

The stock market is important because it fuels growth – not just for big businesses, but for individuals like you. It enables companies to raise capital and sell shares, while you can buy and own them. 

This fresh injection of funds helps businesses expand, innovate and invest in their futures. For example, a tech startup might use money raised from selling shares to develop a groundbreaking product or enter a new market.

Another reason the stock market matters is that it's often seen as an indicator of the broader economy. Rising stock prices typically reflect optimism about economic growth, while falling prices could signal economic uncertainty. Economists, policymakers and investors will always watch the stock market closely to gauge economic health and sentiment.

Next, the stock market offers liquidity. That means you can quickly and easily buy or sell shares whenever you need to. This flexibility makes investing accessible and less risky than other investment types, which may tie your money up for long periods.

Ultimately, by allowing everyone to participate in business success through share ownership, the stock market plays an important role in distributing wealth and fostering economic inclusion. It's a powerful tool that helps businesses and individuals achieve their financial goals together.

Explore stock market opening times

Debunking common stock market myths 

When you're new to investing, it’s easy to get overwhelmed by common misconceptions about the stock market. Let's set the record straight on a stock market and investment myths.

Myth 1: You need to be rich to invest.
Not true. You don't need a lot of money to start investing. Today, many platforms (including ours) let you buy fractional shares, meaning you can start small, even if it’s just a few dollars at a time. Investing isn’t reserved for the wealthy; it’s accessible to everyone.

Myth 2: Investing is just like gambling.
While both investing and gambling involve risk, investing isn't purely about chance. Smart investing is based on research, understanding economic fundamentals and planning for the long term. Gambling, however, relies almost entirely on luck, making them fundamentally different.

Myth 3: Only experts can succeed in the stock market.
That's simply not the case. With the right resources, tools and education, anyone can learn to invest wisely. The stock market isn't just for professionals; it's for everyday people looking to grow their financial future.

Myth 4: Stocks always go up.
Stock markets are higher today than they’ve ever been, but that doesn’t mean it's always heading upward. Markets experience periods of highs and lows, which is why patience and spreading your investments across different areas (diversification) are essential.

Myth 5: You can perfectly time the market.
Even professionals struggle to consistently predict market movements. Attempting to buy and sell at precisely the right moments is incredibly difficult. Research shows that investing consistently over time typically yields better results than trying to time the market.

Ready to get started?

1. Create an account to start investing
2. Access intuitive stock trading tools and resources
3. Expand your financial knowledge with our Learn Hub
4. Level up your stocks with our next-level rewards

FAQs: Your top stock market questions answered

Why does the stock market close on weekends?

Stock markets close on weekends mainly because they operate during standard business hours, which aligns with banking schedules. This downtime also allows for essential system maintenance and helps reduce potential financial risks when banks aren't available to process transactions.

Why does the stock market fluctuate?

The stock market fluctuates due to shifts in supply and demand, driven by factors like news events, company earnings reports, economic indicators and investor sentiment. These elements influence how investors perceive the value of stocks, causing prices to rise and fall.

Is the stock market a primary or secondary market?

The stock market mostly functions as a secondary market, meaning investors trade existing shares among themselves. The primary market is where shares are first issued by companies through processes like IPOs.

Why does the stock market crash?

The stock market crashes due to economic downturns, unexpected financial news, widespread investor panic, etc. While crashes cause uncertainty and losses, markets have historically recovered over time.

Does the stock market affect your 401(k)?

Yes, the stock market directly impacts your 401(k), especially if you’re invested heavily in stocks. When markets rise, your 401(k) balance typically grows. But during downturns, the value may decrease. Remember, diversifying your investments can help manage these fluctuations.

Do rate cuts help the stock market?

Rate cuts can boost stock markets in the short term. Lower interest rates reduce borrowing costs, which encourages spending and investment. This can stimulate economic growth and boost corporate earnings, often leading to higher stock prices. However, the effects of rate cuts can vary depending on broader economic conditions.

Why does inflation affect the stock market?

Inflation affects the stock market because it can erode purchasing power (i.e., reduce how much your money can buy) and it makes it harder for companies to earn profits. High inflation can also lead central banks to raise interest rates, making borrowing more expensive. This can slow economic growth, lower corporate earnings and negatively affect stock prices.

Foris Capital US LLC (FCUL) is a broker-dealer registered with the U.S. Securities and Exchange Commission (SEC) and a Member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). For further information about FCUL, please visit FINRA BrokerCheck.  

FCUL is a subsidiary of Crypto.com. FCUL is a separate entity from Crypto.com, Foris DAX, Inc., and other affiliated Foris companies. FCUL does not engage in the sale, transfer or custody of crypto currencies or digital assets. Crypto.com is a separate entity from FCUL and does not engage in the securities business. Customer balances and crypto holdings held and transacted at Crypto.com and other entities outside of FCUL are not covered by SIPC insurance and are separate from securities transactions and holdings at FCUL.

All investments involve risk, and not all risks are suitable for every investor. The value of securities may fluctuate and as a result, clients may lose more than their original investment. The past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit or protect against loss in a down market. There is always the potential of losing money when you invest in securities or other financial products. Investors should consider their investment objectives and risks carefully before investing.

​​This is informational content sponsored by Crypto.com and should not be considered as investment advice.