What is the stock market?

From the news to social media, you’ve probably heard plenty of people talk about the stock market. But what is it, exactly? And how does it work?

Whether you’re just curious or looking to start investing yourself, understanding the stock market can be super powerful for your family’s financial future. Let’s break it down and get into the stock market basics:

How the stock market works

Have you ever visited a farmer’s market? Vendors like local farmers, bakers, and artists come to sell their items, and people come to buy them.

The stock market is similar. It connects buyers (those who want to buy securities) and sellers (those who want to sell them). Together, buyers and sellers can trade shares of publicly traded companies.

But unlike the farmer’s market, where the price of fresh produce or baked goods is fixed, the price of securities fluctuates according to supply and demand.

This is because the stock market operates a bit like an auction during market hours (9:30 am to 4 pm ET), where buyers have a “bid” and sellers have an “ask.” The price a buyer is willing to pay is the “bid,” while the price at which a seller is willing to sell is the “ask.” The bid and ask change constantly throughout the trading day. Buyers and sellers are matched based on the highest bid and lowest ask, and the result is an executed trade.

Stock market vs stock exchange

While you may have heard “stock exchange” and “stock market” used interchangeably, they’re actually different. The stock market is a collection of all the places people can buy and sell stocks, including individual stock exchanges, like the New York Stock Exchange and the NASDAQ. In the United States, there are actually 13 stock exchanges in the stock market.

How and why companies issue stock

By issuing a stock to the public, companies can raise money to grow and expand. But this process isn’t as easy as you might think; a company can’t just decide that they want everyone to be able to buy their stock.

All companies are considered to be “privately owned” until they go through an Initial Public Offering (IPO) process. If you’ve ever heard someone say that a company is “going public,” this is exactly what they’re referring to.

This process can be complex, take one to two years to prepare for, and cost a company millions of dollars. They’ll have to hire a group of advisors, meet a bunch of regulatory requirements, find an investment bank, file a registration statement with the SEC (the Securities and Exchange Commission), and more.

Once everything is complete, they’ll be able to offer their stock to the public for the first time, marking the transition from private to public ownership.

When an investor buys a share of that stock, they become a partial owner of the company. The more shares they own, the greater their ownership. Now, this doesn’t mean they’ll have a ton of influence on the company’s operations, but depending on the type of stock, they might be able to attend shareholder meetings and vote on some company decisions.

Why invest in the stock market?

People invest in the stock market with the hope that their money will grow, which can happen when a stock they buy increases in value or because a stock pays dividends (aka a portion of a company’s profits paid to shareholders). Investing can be a meaningful way to protect yourself against the impact of inflation, build wealth for the future, save for retirement, and more.

In fact, stocks have generally provided better returns than other options for your money, like savings accounts and bonds.

But, of course, returns are never guaranteed, and you could lose money. Investing for the long term (10 years or more) gives your money a better chance to grow, as you’re more likely to be able to weather the ups and the downs that come with the stock market.

Let’s look at the S&P 500, for example, an index of the 500 largest publicly traded companies. In 2022, the S&P 500 experienced a 19.44% downturn. If you invested your money at the start of the year, you’d probably be pretty disappointed to see how much money you lost by the end of the year.

But if you had a long-term mindset and kept your money invested, you would have actually seen your money grow. In 2023, the index returned 24.23%. And in 2024, it returned 23.31%. That’s a 28.1% return on any money invested at the start of 2022, in just 3 years.

Now, no one knows how the market is going to perform. There could be years of downturns, or the market could end up doing pretty well. The longer the time horizon you have, the less you need to worry about those short-term drops!

Stock market performance

“Look what’s happening to the stock market.” “The stock market is up today!” When you hear a statement like this, the person speaking is usually referring to a major market index, like the S&P 500 or the Dow Jones Industrial Average (DJA). These indexes are good markers of overall stock performance. But, of course, even while stock prices are increasing in general, some individual sectors or companies could be experiencing dips.

The “referees” of the stock market 🏁

As of December 2024, 162 million people in the U.S. own stock.1 And as we talked about a bit above, there are a ton of participants in the stock market beyond everyday investors. That’s where FINRA (Financial Industry Regulatory Authority) and the SEC come in.

FINRA and the SEC are basically the “referees” of the stock market. Like the people in black and white shirts at sports games, they create and enforce rules and guidelines for everyone who participates. This helps protect investors and keep the market fair and efficient.

For example, the SEC is responsible for the regular reports and disclosures companies have to give about their financial situation. These help investors evaluate if investing in a company’s stock is a smart decision.

If someone is investing on a platform that provides investment recommendations, like the Stockpile app does, both FINRA and the SEC have rules to ensure that person only receives recommendations that are a good match for their unique financial goals and risk tolerance. That way, a beginner investor who’s not very comfortable with risk won’t be recommended a super risky security.

The account statements investors get, detailing their securities, positions, and activity, are all thanks to these regulators, too!

Start investing with just $5

You don’t have to be a stock market pro to start investing! The Stockpile money and investment app makes it easy for families to invest together. The best part? All it takes is $5 to get started. Buy a piece of your favorite companies with fractional trading, sharpen your market knowledge with the in-app learning center, and give your money the chance to grow. There are zero trading fees, and kids can even learn on their own: researching companies and sending investment requests that parents approve. Start investing for your family’s future today!