What is the Stock Exchange?

From the wolf of Wall Street to the margin call, movies can make the stock market look like a wild, fast-paced environment where people become billionaires overnight or lose everything they have. In reality, the stock market is not so exciting and is much more complex.

Knowing more about the stock market can seem overwhelming. But understanding the fundamentals of how the stock market works is key to your success.

So what is the stock market? The stock market is a set of exchanges where shares (coins of ownership in companies) are traded between investors. By understanding how this process works, you can start making informed decisions about where to invest your money.

What is the stock market?

To understand the stock market, you must first know how stocks work. Companies sell stocks, also known as stocks, to raise cash to finance their expansion. If you buy stock, you own ownership shares in a particular company. For example, you can buy shares of Apple, Inc. or Tesla and get a (probably small) stake in the company.

Stocks are bought and sold on stock exchanges. When people talk about the stock market, they are usually referring to the major exchanges where stocks are traded. Two of the best known in the United States are the New York Stock Exchange (NYSE) and the Nasdaq.

In the past, merchant exchanges were physical places. Today, trading is often digital, so trading can be done electronically from anywhere in the world. That said, the NYSE — known for the signature bell that signals the start of trading hours each day — still operates a physical trading floor where brokers buy and sell stocks on behalf of their clients.

How does the stock market work?

Not all companies can be part of the stock market. Each stock exchange has its own requirements for a company to be listed.

Once a company is allowed to join a stock exchange, it becomes “listed on the stock exchange”. Publicly traded shares mean that anyone – not just company insiders like employees and board members – can buy and sell the company’s shares.

The company must also comply with federal regulations and regularly submit its financial records to the United States Securities and Exchange Commission (SEC). You may review these financial documents at any time by visiting the company’s Investor Relations page or by viewing them on the SEC’s website.

Types of investments

Although stocks are the most well-known type of investment, there are other investment options you can choose from. Here are some of the most common types:

  • Stocks: If you buy stocks, you own a fractional share of the company. You can make money if the stock price goes up and you sell it for more than you paid. Some stocks also pay dividends – a portion of the company’s profits that is paid out to shareholders.

  • Exchange Traded Funds (ETFs): A type of investment fund that typically tracks a group of assets, such as stocks or bonds. ETFs are bought and sold on exchanges, just like stocks.

  • Mutual funds: Like ETFs, mutual funds allow you to invest in multiple stocks, bonds, money markets, and other assets in a single investment vehicle at once. When you invest in a mutual fund, your money is pooled with investments from other investors to buy groups of stocks.

  • Index funds: Index funds are types of ETFs and mutual funds. With index funds, you invest in a fund that tracks a market index, which is a portfolio of stocks or other securities in a particular part of the market. For example, the S&P 500 and the Dow Jones Industrial Average (DJIA) are stock market indices. The S&P 500 is an index of the 500 largest publicly traded companies in the United States based on market capitalization, while the DJIA is an index of the 30 largest publicly traded companies in the United States.

How are stock prices determined?

When you research stocks, you will find that prices are everywhere. Some stocks only cost a few dollars. Others, like well-known companies like Tesla, could cost hundreds of dollars per share.

What determines stock prices? There are three major factors:

  • Supply and demand: Stock prices are largely determined by supply and demand. That is, how many people want to buy or sell the stock at the current price. If more people want to buy a stock than sell it, the price goes up. If more people want to sell a stock than buy it, the price goes down.

  • Company news and earnings: Another factor that affects stock prices is company news and profitability. If a company releases good news — like better-than-expected earnings reports — investors may be willing to pay more for its stock. On the other hand, if a company has bad news — like layoffs or declining sales — investors may be less likely to buy its shares and the stock price may fall.

  • Investor Sentiment: Investor sentiment is another important factor in determining stock prices. When investors are pessimistic about the economy or believe a recession is imminent, stock prices typically fall.

How to invest in the stock market

Now that you know how the stock market works, you might be ready to start buying stocks yourself. Depending on your goals and comfort level with investing, you can use one of three main approaches:

Employer-sponsored pension plan

If you have access to an employer-sponsored retirement plan, such as a 401(k) or 403(b), you may be able to use your plan to invest in stocks, mutual funds, and stocks. other titles. Many employer-sponsored retirement plans offer a selection of investment options, such as index funds based on your target retirement date, and some even offer advice on how to invest your money.

With many 401(k) and 403(b) accounts, you can make contributions to the account through payroll deduction. And some employers will match a portion of your retirement contributions, helping you save more money over time.

Brokerage account

If you don’t have an employer-sponsored plan — or want to invest for goals other than retirement — another option is to open a brokerage account on your own. Some common reasons people open a brokerage account include:

  • Retirement: You can open an Individual Retirement Account (IRA) and invest in stocks, mutual funds, and ETFs to save for retirement.

  • Education: If you want to invest money for your child’s future, you can open a UGMA/UTMA.

  • General: If you have other goals, like starting a business or buying a house, you can open a taxable investment account to buy and sell stocks and other securities.

Robo-advisor

While movies highlight how much money can be made by investing, they generally ignore how much work investing can be. Managing a stock portfolio, deciding what to invest in, and monitoring stock market conditions can take time, and even experts make mistakes.

Another way to invest in stocks is to open an account with a robo-advisor like Acorns Invest. With a robo-advisor, you typically answer a few questions about your financial goals and how long you want to invest your money. The robo-advisor platform will typically offer automated, algorithm-based financial planning services with little or no human oversight. Portfolios are normally managed by the robo-advisor and, depending on your investment goals, they can be a good choice for new and uninitiated investors, especially those with long-term investment goals.

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