What is the stock market: A beginners guide to the stock market (2024)

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• The stock market is a group of stock exchanges where shares of public companies are bought and sold.
• The stock market provides liquidity and price transparency to investors.
• The Securities and Exchange Commission regulates the US stock market.

There are many stock markets around the world. In the US, you might hear the stock market today being referred to as Wall Street. Investors can access the stock market through a traditional brokerage firm, or online through a stock trading app.

The best stock trading apps, like SoFi Invest or Charles Schwab, allow investors to buy and sell assets on the stock market from a mobile device.

Here's how you can invest in the stock market today.

What is the stock market?

The stock market is an umbrella term for all of the stock exchanges in a country or region. It includes venues where companies can sell shares of their stock to the public, and investors can buy and sell those shares among one another after they've been issued.

The US stock market has two main exchanges: The New York Stock Exchange (NYSE) and the Nasdaq. There are also a number of smaller stock exchanges, including some named for the cities where they are located such as Boston, Chicago, and Philadelphia.

How does the stock market work?

Both companies and investors can find upside through the stock market. When someone invests in stocks, they hope that a company will do well. If the company turns a profit, the stock owner gets a share of the profits.

Of course, if a company underperforms, investors can expect smaller returns. On the company's end, investors buying stock offers a way to raise money.

The stock market can be further broken down into two main categories: primary and secondary.

• Primary market: The primary market is where companies sell new shares of stock to the public for the first time. This is most often seen through an initial public offering (IPO). At this stage, investors purchase shares directly from the company.
• Secondary market: The secondary market is where investors buy and sell stocks that have already been issued by companies among themselves. The majority of stock transactions within the stock market occur in the secondary market.

What role does the stock market play in the economy?

The stock market is volatile. As market prices swing up and down, you might see reports of those movements splashed across the headlines, and with good reason. The stock market plays several key roles in a country's economy.

"The stock market fuels economic growth by providing liquidity to investors," says Andrew Lokenauth, founder and writer of Fluent in Finance.

"This means that it allows them to easily buy and sell shares of publicly traded companies," Lokenauth explains. "This liquidity allows investors to quickly and easily access capital, which in turn helps fuel economic growth."

As an investor, the transparency of the stock market provides a level playing field when building a portfolio. Since everyone should have access to the same information, every investor expects a fair stock trading opportunity.

Fair trading opportunities are protected by the regulating agencies of any stock market.

"Regulations around the world have evolved to meet the ever-changing landscape of the markets, but their core purpose remains the same: to protect investors and ensure that companies behave in a fair and transparent manner," says Daniel Colston, a CFP® and CEO of Upward Financial Planning.

"The regulations that govern the stock markets are designed to protect investors and ensure that companies act in a fair and transparent manner," Colston says.

As investors continue to build wealth through the stock market, maintaining fair trade with these regulations is critical.

Who regulates the stock market?

In the US, the Securities and Exchange Commission (SEC) regulates the stock market. The government agency was created to protect investors and maintain a fair market.

With an emphasis on rule enforcement, the SEC works to protect investors from financial fraud and regulate the activities of stock market professionals. Additionally, the SEC serves an educational role by providing investors with accurate stock market information.

What are stock market indexes?

A stock market index tracks the performance of a select group of individual stocks. Stock market indexes often have a particular theme. For example, an index might only include individual stocks in the technology sector. Others are designed to provide a measure of the broader market's performance.

Three of the most closely watched measures of the US stock market are the , Dow Jones Industrial Average, and the Nasdaq Composite Index. You'll often hear these mentioned in daily news reports about the performance of stocks.

Some other stock market indexes include:

• Russell 2000 Index
• The Wilshire 5000
• Nasdaq Composite
• FTSE 100 Index
• Nifty 50

You can't invest directly in an index, like the S&P 500. Instead, you can invest in index funds that aim to match the returns of a specific market index. Index funds pool investors' money into a portfolio of securities that mimic a specific market index.

Regardless of the index, most stock market indexes measure financial health for the sectors involved. If an index is down, many investors would consider it a bad sign for the industry or the market.

Should you invest in the stock market?

The stock market is essential to the US economy as it fuels economic growth, provides funding to companies, and gives liquidity and capital to investors. Of course, there can be a great deal of risk involved when you invest in stock. However, strict regulations and stock market transparency protect investors and ensure companies are being fair and transparent.

Investing in the stock market can seem overwhelming, but the accessibility of online stock trading apps, online brokerages, and robo-advisors has made buying and selling stock on the stock market easier than ever.

There are still risks involved, of course, but having a diverse portfolio of stocks and understanding how the stock market works can significantly decrease your overall risk. It's also key that you understand what kind of investor you are (short-term or long-term), whether you prefer to be hands-on or hands-off, and what your goals are.

But before jumping headfirst into the stock market, consider creating a financial plan that highlights your goals and points in the right direction. You can also reach out to a financial advisor or CFP for expert advice and guidance.

Stock market — Frequently asked questions (FAQs)