The stock market is a financial marketplace that matches investors who want to buy stocks with those who are willing to sell them. People invest in the market with the hope that their shares will appreciate in value and pay dividends. But even if you aren’t invested directly in the market, it’s important to understand how the markets work. For example, the movements of the markets are reflected in the prices of goods and services you buy on a daily basis, from the price of a new iPhone to your grocery bill.
The basic workings of the stock market can be explained by the principles of supply and demand. When investors and traders agree to buy or sell stocks, they collectively shape the demand for a specific company’s shares, which ultimately shapes the share’s price. The price of a stock rises when demand exceeds supply, and vice versa. This process is known as “price discovery,” and it’s what sets the prices you see on your brokerage account or in online graphs of historical share prices.
Publicly traded companies that offer their shares to the general public are called “stocks.” Some of these stocks trade on a formal exchange, such as the New York Stock Exchange or Nasdaq. These are referred to as “stocks that are listed,” and they are subject to stringent regulations and disclosure laws. Other stocks are not listed and can only be traded through private channels, such as with your local investment broker or by using trading strategies like short selling or margin buying. Stocks are also grouped into categories based on the location of their headquarters and the nature of their business, such as domestic (U.S.) or international (“emerging market”) stocks.