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What is the Stock Market?

Kevin Voigt Updated on August 12, 2025

The stock market is a system where investors buy and sell ownership in companies through shares. It operates as a centralized platform—mainly through stock exchanges—where businesses raise capital from the public in exchange for equity. This capital helps them grow, hire and innovate. For individuals, the stock market is a pathway to grow wealth over time, primarily through capital appreciation and dividends.

What are Stock Market Hours?

In the U.S., the major stock exchanges (like the NYSE and Nasdaq) operate from 9:30 AM to 4:00 PM Eastern Time, Monday through Friday, excluding market holidays. There are also pre-market sessions (typically 4:00 AM to 9:30 AM) and after-hours trading (4:00 PM to 8:00 PM), though these periods have lower liquidity and higher volatility.

How Does the Stock Market Work?

When a company issues shares through an Initial Public Offering (IPO), it lists on a stock exchange. Investors can then buy and sell those shares on the secondary market. The stock market uses electronic systems to match buyers and sellers. Prices change based on supply and demand, news, earnings reports, economic indicators and investor sentiment.

What Causes the Stock Market to Go Up and Down?

Stock prices rise when more people want to buy than sell, and fall when selling pressure exceeds demand. This is influenced by:

Economic indicators (e.g. GDP growth, unemployment).
Interest rate changes.
Corporate earnings.
Political and global events.
Market sentiment.
Natural disasters or pandemics.

Why is the Stock Market so Important?

The stock market plays a vital role in economic growth:

Companies raise capital to fund operations and expansion.
Investors have a means to grow wealth.
Retirement accounts (like 401(k)s) depend heavily on market returns.
It reflects the economic mood and forecasts future conditions.

Bull vs Bear Market

Bull Market: A prolonged period of rising prices, often tied to investor confidence and strong economic performance.
Bear Market: A sustained decline (typically 20% or more from recent highs), usually driven by economic downturns, fear or uncertainty.

Stock Exchange vs. Stock Market Index

What is a Stock Exchange?

A stock exchange is a marketplace where securities (like stocks, ETFs, bonds) are bought and sold. It ensures transparency, regulatory oversight and liquidity.

Types of stock exchanges

NYSE (New York Stock Exchange)

Founded in 1792, it is the world’s largest exchange by market capitalization. It lists many blue-chip companies and uses both physical trading floors and electronic systems.

NASDAQ (National Association of Securities Dealers Automated Quotations)

Launched in 1971, Nasdaq is fully electronic and is known for listing technology and growth-oriented companies.

What is a Stock Market Index?

An index is a statistical measure that represents the performance of a specific group of stocks. It helps investors track the health of markets or sectors.

Types of Stock Market Indexes

DJIA (Dow Jones Industrial Average)

Comprises 30 major U.S. companies. It’s price-weighted, meaning companies with higher share prices influence the index more. (Learn more: What is the Dow Jones Industrial Average?)

S&P 500

Tracks 500 large-cap U.S. companies and is market-cap weighted, making it a broader and more accurate reflection of the U.S. economy. (Learn more: What is the S&P 500?)

NASDAQ Composite

Includes over 3,000 stocks listed on the Nasdaq exchange, with a heavy focus on tech and growth sectors.

Types of companies

Public Company

Public companies sell shares to the general public via stock exchanges. They're required to disclose financial information regularly.

Private Company

These are owned by individuals or small groups. Their shares aren't available to the public, and they’re not subject to the same disclosure regulations.

What are Stocks? Buying and Selling

Stocks represent a piece of ownership in a company. When you buy a stock, you become a shareholder. Publicly traded stocks can be bought and sold on exchanges through brokers.

How Stock Prices are Determined

Stock prices are driven by supply and demand. Market participants analyze company performance, future growth potential, economic outlooks and more. Investor psychology, speculation and algorithmic trading also play roles.

Other Assets Sold on Stock Markets

Besides stocks, markets also offer:

Bonds: Loans to companies/governments with fixed returns.
ETFs: Bundled assets tracking indexes or sectors.
Mutual Funds: Pooled investment funds managed by professionals.
Options/Futures: Derivatives used for hedging or speculative trading.

Why Invest in the Stock Market?

Investing in stocks offers:

Long-term capital growth.
Dividend income.
Compounding returns.
Inflation hedging.
Diversification across sectors.

Historically, the stock market has outperformed other investment vehicles over long periods.

How to Invest in the Stock Market

What are Brokerages?

Brokerages provide access to markets. There are two main types:

Full-service Brokerage

Offer personalized advice, portfolio management, financial planning. Higher fees, ideal for hands-off investors.

Discount Brokerage

Low-cost, self-service platforms with tools and research for DIY investors.

Investing strategies

Buy and Hold: Invest in solid companies for long-term growth.
Index Investing: Track market indexes through ETFs or mutual funds.
Value Investing: Buy undervalued stocks with growth potential.
Growth Investing: Focus on companies expected to grow faster than average.
Day Trading/Swing Trading: Short-term strategies based on technical analysis.

Things to be Careful About Stock Market Investing

Volatility: Markets can swing wildly in the short term.
Emotional Decisions: Fear and greed can lead to poor choices.
Lack of Diversification: Concentrated holdings increase risk.
Timing the Market: Trying to predict highs and lows is rarely effective.
Fees and Taxes: Trading costs and capital gains taxes can eat into profits.

Frequently Asked Questions about Stock Markets

Investors vs Traders

Investors aim for long-term wealth, often through diversified portfolios. (Learn more: How to invest in stocks.)
Traders seek to profit from short-term price movements. (Learn more: How to trade stocks.)

Bond Market vs Stock Market

Bond market is for debt instruments; considered safer with fixed returns.
Stock market offers ownership and higher potential returns but also more risk.

NASDAQ vs NASDAQ index

NASDAQ is an exchange.
NASDAQ Composite is an index tracking performance of listed companies.

DJIA vs. S&P 500 vs. NASDAQ: Which one is better?

DJIA: Limited (30 stocks), price-weighted.
S&P 500: Broad exposure, market-cap weighted, widely used benchmark.
NASDAQ Composite: Tech-heavy, more growth-oriented.

Each serves different purposes; many investors use all three to gain a complete market view.

Note: This story is for educational purposes only and is not financial advice. Always consult a financial advisor or conduct your own research before making investment decisions. Inherent in any investment is the potential for loss.

The S&P 500 is an unmanaged index.