Overview
You’ve probably heard stories about people making big gains in the stock market from friends, coworkers, or relatives who’ve seen their investments grow. Financial headlines often use terms like “bull market” or “S&P 500,” but it’s easy to feel lost if you’re not familiar with how the market actually works.
The truth is, the stock market isn’t just for finance professionals. It’s a system that anyone can understand with a bit of guidance. Whether your goal is to build long-term wealth, save for a major expense, or simply grow your money, understanding how the stock market works is an important first step.
What are Stocks?
Think of stocks as tiny slices of a company that you can own. When you buy a stock (also called a share or equity), you’re purchasing a piece of that business. If you own 100 shares of a company that has one million shares total, you own 0.01 percent of that company.
Companies sell these shares to the public to raise money; instead of taking out massive loans, they offer ownership stakes to investors. That money helps them expand operations, develop new products, hire employees, or pursue other growth opportunities. As a shareholder, you get to participate in the company’s journey and, hopefully, its profits.
There are two main types of stocks you’ll encounter:
Common stocks: These are what most people invest in. Common stocks give you voting rights on important company decisions (like who sits on the board of directors) and the potential to benefit from the company’s growth through rising stock prices and dividends.
Preferred stocks: These stocks are a hybrid investment that includes features of common stock and debt securities (think bonds). Preferred stocks don’t typically come with voting rights, but they often pay higher, fixed dividends and give shareholders priority if the company ever goes bankrupt and distributes assets.
What is the Stock Market?
The stock market isn’t a single physical location. Rather, it’s a network of exchanges where investors buy and sell stocks. Think of it like a massive, ongoing auction where millions of people are simultaneously bidding on thousands of different companies. When someone says “the stock market,” they’re referring to this entire ecosystem of exchanges, traders, investors, and the companies whose shares are being traded.
The terms “stock market” and “stock exchange” often get used interchangeably, but they’re actually different. The stock market is the broader concept, while stock exchanges, like the New York Stock Exchange (NYSE) or NASDAQ, are the specific venues where the trading happens.
Primary vs. secondary markets
The primary market is where companies first sell their shares to the public through an initial public offering (IPO). This is when a private company goes public and offers shares for the very first time. The company receives the money from this initial sale.
The secondary market is where most of the action happens. This is what you’re accessing when you buy or sell stocks through your brokerage account. You’re trading existing shares with other investors, not buying directly from the company. The stock exchange tracks all these transactions and reports prices in real time.
Major stock exchanges
Several major stock exchanges operate around the world, but there are a couple that dominate the landscape in the US:
NYSE: The NYSE is the largest stock exchange in the world by market capitalization, representing many of the most established and influential US companies. Located on Wall Street in Manhattan’s Financial District, it operates as a hybrid market, combining electronic trading with a traditional physical trading floor where brokers and specialists manage orders. Well-known NYSE-listed companies include Coca-Cola, Johnson & Johnson, and JPMorgan Chase.
NASDAQ: The NASDAQ is the world’s second-largest stock exchange and is known for its strong concentration of technology and growth-oriented companies, including Apple, Microsoft, Amazon, and Alphabet. Unlike the NYSE, the NASDAQ has always been fully electronic, using automated systems to match buyers and sellers efficiently.
Most major North American exchanges operate on the same schedule: 9:30 am to 4 pm Eastern Time, Monday through Friday, except for market holidays.
Beyond the US, other major exchanges include the London Stock Exchange (LSE), the Tokyo Stock Exchange (TSE), and the Shanghai Stock Exchange (SSE), each playing a key role in global financial markets.
How Stock Prices Work
Stock prices constantly fluctuate based on one simple principle: supply and demand. When more people want to buy a stock than sell it, the price goes up. When more people want to sell than buy, the price drops. The current stock price represents the last price at which a buyer and seller agreed to make a trade.
In the short term, stock prices can swing wildly based on news, rumors, or investor emotions. But over the long term, a stock’s value generally reflects how profitable and successful the underlying company is. As a company grows its earnings, demand for its stock typically increases, pushing the price higher.
Understanding Market Indices
If you’ve ever heard someone say that the market was up today, they’re probably referring to a market index. An index tracks the performance of a specific group of stocks to give you a snapshot of how a particular segment of the market is performing.
Indices serve as benchmarks that investors use to measure their own portfolio performance and gauge overall market health. They’re also the foundation for popular investment products like index funds and exchange-traded funds (ETFs).
Major indices to know
The S&P 500 includes 500 of the largest publicly traded companies in the US and is widely considered the best gauge of the overall US stock market. It’s weighted by market capitalization, meaning bigger companies have more influence on the index’s movement.
The Dow Jones Industrial Average (DJIA) tracks 30 major American companies across various industries. Despite including only 30 stocks, it’s one of the most widely followed indices in the world.
The NASDAQ Composite includes all stocks listed on the NASDAQ exchange, over 3,000 companies, but it’s heavily weighted toward technology stocks.
Getting Started: How to Invest
Now that you understand what the stock market is and how it works, let’s talk about the practical side of actually investing your money. Getting started is easier than you might think.
1. Set your investment goals
Before you start buying stocks, clarify what you’re investing for. Whether you’re saving for retirement 30 years down the road or building a down payment fund for a house in five years, your goals will shape your investment strategy.
They also create a natural time horizon, which is the investing term for how long you plan to keep your money invested before you need it.
2. Assess your risk tolerance
Risk tolerance is your ability and willingness to handle fluctuations in your investment’s value. Some people can watch their portfolio drop 20 percent and calmly wait it out, while others lose sleep over a five percent dip.
There’s no right or wrong answer. It’s about knowing yourself and choosing investments that match your comfort level.
3. Determine your strategy
For beginners, long-term investing is almost always the better approach. This means buying stocks (or index funds) and holding them for years or even decades, riding out the market’s ups and downs to benefit from long-term growth. This strategy requires less time, less stress, and historically delivers better returns.
Day trading, which involves buying and selling stocks within the same day to profit from short-term price movements, might sound exciting, but it’s risky and time-intensive. Most day traders lose money, and it requires constant market monitoring and deep technical knowledge.
One of the most critical principles in investing is diversification. If you invest all your money in a single company and that company struggles, your entire portfolio suffers.
Instead, spread your investments across different companies, industries, and even asset types. This way, if one investment performs poorly, others can help balance it out. For beginners, index funds and ETFs offer instant diversification by holding hundreds or thousands of stocks in a single investment.
4. Open a brokerage account
Your gateway to the stock market is a brokerage account. A brokerage firm acts as the middleman connecting you to stock exchanges. They execute your buy and sell orders and provide you with access to research tools, market data, and educational resources.
Many online brokers can get you set up in 15 minutes or less. You’ll need basic information like your Social Security number, employment details, and bank account information for funding your account.
There are two main types of brokers:
Full-service brokers: These brokers assign you a dedicated advisor and offer comprehensive financial planning services, but they typically charge higher fees.
Discount or online brokers: These firms offer self-directed investing through user-friendly platforms and apps at much lower costs. In fact, many now charge zero commissions on stock and ETF trades.
When comparing brokers, look at factors like trading fees, account minimums, available investments and research tools, ease of use, and customer support quality.
5. Make your first investment
Once your account is funded, it’s time to make your first purchase. Start small—there’s no rule saying you need to invest thousands of dollars right away. Many brokers now offer fractional shares, meaning you can buy a portion of expensive stocks with as little as $1 or $5.
If you’re feeling overwhelmed by individual stock picks, consider starting with a low-cost index fund or ETF that tracks the S&P 500.
To place a trade, simply search for the stock or fund ticker symbol in your brokerage platform, enter the number of shares you want to buy or the dollar amount you want to invest, then submit your order. Most beginners should stick with market orders, which execute immediately at the current price.
The Point
You don’t need to be a financial expert or have thousands of dollars to get started in the stock market. With a basic understanding of how the market works, clear financial goals, and the discipline to stick with a long-term strategy, you can get started no matter how much money you have.
Whatever you do, start small, stay consistent, and let time and compound growth work their magic for you.
by your friends at The Daily Navigator
