The stock market is the world’s meeting place for buyers and sellers of financial securities.
While stock trading has many complexities, the concept behind the stock market is pretty simple. Operating much like an auction house, the stock market enables buyers and sellers to negotiate prices and make exchanges.
Commonly the item being exchanged is a stock, which is a share of ownership in the assets of a publicly traded company. In decades past, these transactions likely took place in a physical marketplace, such as the floor of a stock exchange. Today, they most often happen electronically through an online stock broker.
How the stock market works
Stock market participants determine the price for each security, based on the levels at which they’re willing to buy or sell. Computer algorithms generally do most of those calculations now, but the basics of trading are the same as they have always been.
Buyers offer a “bid,” or the highest amount they’re willing to pay, which is usually lower than the amount sellers “ask” for in exchange. This difference is called the bid-ask spread. For a trade to occur, a buyer needs to increase his price or a seller needs to decrease hers.
Each of these decisions happens on a stock-by-stock basis, but overall stock prices often move in tandem because of news, political events, economic reports and other factors.
How do you invest in the stock market?
If you have a 401(k) through your workplace, it’s possible you already are invested in the stock market. Mutual funds, which are often comprised of stocks for several different companies, among other investments, are common in 401(k)s.
Mutual funds represent one of the more “passive” ways to invest in the stock market. In contrast, “active” stock strategies typically involve buying and selling shares of individual companies, in the hopes of turning a profit through movement in the companies’ stock prices.
There are things investors should know before they pursue an active stock-buying strategy.
There are several things you should know before you pursue an active stock strategy, however, and the resources below can help you get the knowledge you need to start:
- Understand the potential risks and rewards of buying individual stocks versus various types of mutual funds.
- Learn how you can execute individual stock purchases by reading our guide on how to buy stocks.
- Explore NerdWallet’s top-rated stock brokers for new investors in its analysis of the best online stock brokers for beginners.
History of the stock market
The first stock-like market dates back to the 1500s in Belgium. Back then, the market consisted of brokers and moneylenders meeting to wrangle out deals related to business, government or individual debt.
By the 1600s, the modern incarnations of the stock market began to take root, in response to a boom in Western Europe’s imports from the East Indies and Asia. In 1773, the first stock exchange was formed in London — the London Stock Exchange.
In the United States, the roots of today’s financial market developed soon after the country’s founding. In 1792, 24 stockbrokers signed the Buttonwood Agreement, which started the New York Stock Exchange Board — what’s known today as the New York Stock Exchange.
Electronic trading revolutionized the stock-buying process, making it cheaper and easier for individual investors to take part.
For years, the trading floors of stock exchanges around the world were the primary places where the buying and selling of stocks occurred. That all changed with the advent of computers and a new, entirely electronic exchange — Nasdaq — that debuted in 1971. In turn, other exchanges adopted electronic trading.
The appearance of electronic trading revolutionized the stock-buying process, making it cheaper and easier for individual investors to take part. Orders no longer need to be routed to a trader on the floor of a stock exchange for execution; instead, they can be conducted electronically via online brokers.
Stock market versus stock exchanges
People often use “stock market” and “stock exchange” interchangeably. The stock market encompasses all publicly traded stocks available to investors, while exchanges list — or include for trading — a subset of that universe.
Anna-Louise Jackson is a staff writer at NerdWallet, a personal finance website. Email: email@example.com. Twitter: @aljax7.