You may already invest through a 401(k) or a self-directed online brokerage. While it’s easy to buy and sell stocks, a lot happens behind the scenes after you click the “Submit Order” button.
Knowing how the stock market works can improve your investment knowledge and help you avoid common investing mistakes by understanding the stock market basics.
What is the Stock Market?
When you invest in stocks, investors don’t exactly buy shares directly from publicly-traded companies. Some examples of publicly-traded equity stocks include:
- Tesla (Stock symbol: TSLA)
- Nike (Stock symbol: NKE)
- Apple (Stock symbol: AAPL)
Instead, the common trend is to buy shares of an individual stock or stock fund that trades on a stock exchange (also called a stock market) like the Nasdaq.
The exchange displays the current market price it costs to buy a single share or sell shares. The stock market also tracks the total number of shares for a specific fund or stock so an investor can calculate the company valuation.
Most investors trade shares of stocks using an online brokerage account by placing buy or sell orders. These brokers connect to stock exchanges across the world but usually within the same country.
Computer software executes the trade and the transaction and the exchange records the transaction.
What Trades on the Stock Market?
Investors make general comments like:
- “I’m investing in the stock market.”
- “The stock market went up today.”
- “I want to avoid stock market volatility.”
- “The stock market is a roller coaster.”
What exactly do the above statements mean?
Usually, stock market investing means holding equity positions in publicly-traded companies. These investments rely on rising stock prices to earn a profit but may also earn dividend income.
You can invest in the stock market with these assets:
- Individual stocks
- Stock ETFs
- Stock mutual funds
- Bond funds
- Commodity funds
- Cryptocurrency funds
While stock exchanges don’t trade individual bonds, commodity futures, or cryptocurrency funds, there are ETFs and mutual funds that hold these assets and trade on the stock exchange. These stock market-like investment products are the easiest way for savvy investors to effortlessly get exposure to these assets that usually have high investment minimums.
You must also invest in private startups outside of the stock market. But it may be possible to buy stock of private equity firms, like Blackstone (stock symbol: BX), that offer indirect exposure to this asset class.
Do Bonds Trade on the Stock Market?
Stocks and bonds don’t trade on the same platforms even if your brokerage offers both asset classes.
Individual stocks trade on the stock market and individual bonds trade on the bond market.
But it’s possible to buy bond ETFs and mutual funds for corporate and government bonds. The fund provider owns the bond securities but investors can invest and earn a recurring dividend.
Typically, bonds require a multi-year investment commitment and may not sell quickly. Bond funds let investors buy and sell shares on-demand and with minimal fees.
When is the Stock Market Open?
Each stock market has different trading hours. The US exchanges (New York Stock Exchange and Nasdaq) open at 9:30 am Eastern Standard Time and close at 4:00 pm EST Monday through Friday. Markets may close or have reduced hours for national holidays.
Some exchanges allow for pre-market trading (4 am to 9:30 am) and after-hours trading (4:00 pm to 8:00 pm). Usually, trading volumes are lower and share prices might be less favorable during non-standard market hours.
Also, investors may need to use a traditional online broker like Schwab or Fidelity to get extended hours trading access.
What are Stock Exchanges?
It’s not possible to buy any stock in the world with any investing app. This is because there isn’t one stock market for the world as a whole.
For example, when someone refers to the “US stock market,” they generally refer to the Nasdaq and New York Stock Exchanges.
Most nations have their own stock exchange where casual and professional investors buy shares. International companies may have listings on multiple exchanges.
Many developed nations have several exchanges that trade specific types of stocks and asset classes.
All of these stock exchanges make the global stock market. Or the various European exchanges may compose the “European stock market” but stocks for one country may perform differently than another country’s exchange.
If you visit investment news websites like CNBC or Barron’s you may see prices for stock indexes like the Nasdaq or the FTSE beside individual stocks.
Most United States-based investing apps only supports stocks that are registered to trade on the most prominent US stock exchanges.
Here some of the most common stock exchanges that offer domestic and international stocks.
New York Stock Exchange
The New York Stock Exchange (NYSE) is the world’s largest stock exchanges based on the companies’ total market capitalization.
Several well-known names include:
- 3M (MMM)
- American Express (AXP)
- Coca-Cola (KO)
- Exxon Mobil (XOM)
- Johnson & Johnson (JNJ)
Companies with stock listing on the NYSE come from various industries but can favor the financial and industrial sectors.
Approximately 2,200 stops currently trade on this exchange. But more stocks and funds trade on sub-exchange like the NYSE Arca or NYSE Amex.
Several sub-exchanges make up the NYSE. Most online brokerages let investors trade those stocks and exchange-traded funds that trade on these smaller exchanges.
- NYSE Arca: Primarily exchange-traded funds (ETFs) and over 8,000
- NYSE Amex: Growth stocks with a smaller market capitalization
These sub-indexes may have lower listing fees and more lenient requirements than the NYSE.
While the federal government regulates the stock market, each stock exchange has different requirements that can help build an identity with investors to find a specific type of stock asset class.
For most investors, it doesn’t matter if the stock or fund trades on the original NYSE or a sub-exchange like the NYSE Arca or NYSE Amex. Most brokers offer stocks from the full NYSE and the sub-NYSE exchanges without trade commissions.
Nasdaq Stock Exchange
The Nasdaq (National Association of Securities Dealers) is the second busiest exchange in the United States, based out of New York City and launched in 1971. This exchange has over 3,000 stocks and most are technology stocks but some financial stocks also trade here.
Some of the notable stocks that trade on the Nasdaq include:
- Alphabet Inc./Google (GOOG)
- Amazon (AMZN)
- Facebook (FB)
- Microsoft (MSFT)
- Netflix (NFLX)
Investors can buy Nasdaq index funds to track the performance of the index. Most Nasdaq-focused funds only invest in the exchanges 100 largest companies but purchasing a composite index fund lets investors get exposure to each listing.
London Stock Exchange
The London Stock Exchange is one of the most prominent European exchanges. It’s common for investors to refer to this stock market as the FTSE (Financial Time Stock Exchange Group), sometimes pronounced “footsie,” that tracks the largest companies that trade on this United Kingdom-based exchange.
British and European companies may have their primary stock trade on the London Exchange but also have another symbol trade on the New York Stock Exchange or Nasdaq as one of these stock types:
- Automated Depository Register (ADR)
- Over the Counter (OTC)
In many cases, American investing apps won’t buy directly from the overseas stock market but can buy the ADR or OTC equivalent. These shares may have less trading volume but might be the only way for investors to directly invest in companies with overseas headquarters.
Here are some examples of foreign stocks that trade on the London and American markets.
| Company Name | London Stock Symbol | US Stock Symbol |
| BHP Group | BHP.L | BHP |
| Royal Dutch Shell | RDSB.L | RDS-B |
| Unilever | ULVR.L | UL |
Frankfurt Stock Exchange
The Frankfurt Stock Exchange trades German stocks and other European companies. Foreign investors can quickly track this exchange by tracking the DAX index.
Some of the stocks that trade on the Frankfurt and American indexes include:
| Company Name | Frankfurt Stock Symbol | US Stock Symbol |
| BASF | BAS.DE | BASFY |
| Bayer | BAYN.DE | BAYRY |
| Volkswagen | VOW.DE | VWAGY |
Tokyo Stock Exchange
The Tokyo Stock Exchange is the home for Japanese stocks. The Nikkei price quotes indicate how this market is performing.
Companies that trade in Tokyo and New York are the following.
| Company Name | Tokyo Stock Symbol | US Stock Symbol |
| Canon Inc. | 7751.T | CAJ |
| Nintendo | 7974.T | NTDOY |
| Toyota Motor | 7203.T | TM |
What are Stock Market Indexes?
A stock market index is different than a stock market exchange.
For example, the Nasdaq 100 only tracks the performance of the one hundred largest stocks that trade on the Nasdaq stock exchange.
Most indexes track a specific number of stocks for one stock exchange. However, some indexes track companies from multiple exchanges, such as the S&P 500.
Here are some of the best-known stock exchanges. These indexes can be an easy way to decide if the overall stock market is in a bear market or bull market, for instance.
Investors and fund managers trying to outperform the stock market, may also use one of these benchmarks as a comparison tool. For example, their goal might be trying to choose winning stocks that perform better than the S&P 500.
S&P 500
The S&P 500 tracks 500 of the biggest companies trading on the New York Stock Exchange and Nasdaq. Companies on the list have the largest market capitalization.
As a quick aside, market capitalization is the total market value of a company when you multiply the current share price and the total number of outstanding shares.
This index rebalances quarterly and growing companies can replace smaller companies during these scheduled rebalancing.
As this index tracks the largest companies on the US stock market from over 100 industries, many investors and funds use the S&P 500 as their industry benchmark.
The largest industries include:
- Information technology
- Health care
- Communication services
- Consumer discretionary
- Financials
As the S&P 500 represents the largest companies from most industries, its performance can easily indicate the US stock market’s health.
Nasdaq 100
Another popular investment strategy is buying a Nasdaq 100 fund that invests in the 100 largest companies that trade on the Nasdaq. This index usually excludes financial stocks as the Nasdaq is mostly technology stocks but also has consumer services and healthcare companies.
Technology company stocks (“Tech stocks”) can also have more growth potential than financial stocks too. During a bull market, technology stock share prices usually rise more rapidly than financial stocks.
This index can have more growth potential than the S&P 500 when investors favor technology-type stocks. However, the index can be more volatile than the S&P 500 as it represents fewer industries.
It’s possible for stocks to be in the Nasdaq 100 and S&P 500 indexes. The Nasdaq 100 rebalances annually in December.
Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA) index has 30 stocks that the Wall Street Journal curates with quarterly rebalancing. This index is sometimes known as the “Dow 30” as it only tracks 30 companies.
This index holds companies from a variety of new and legacy industries to capture growth potential and blue-chip stock stability and dividends. But this index can be more volatile as it invests in fewer companies.
Unlike most indexes, the DJIA index performance is dictated by company share price instead of the stock’s market capitalization.
Stocks with a higher share price impact the Dow 30 index performance more than companies with a larger market cap.
For example, a stock with a $200 share price but a $115 billion market capitalization sways the Dow 30 performance more than a component with a $100 share price but a $2 trillion market cap.
Dow 30 index funds can outperform S&P 500 or Nasdaq 100 index funds if the share prices have a higher percentage gain than the average share price gain of the competing index.
With market-cap-based indexes, the largest companies influence the market more than smaller companies. For example, the performance of a $2 trillion company has a greater effect than one with a $100 billion valuation.
Russell 2000
The Russell 2000 tracks US small-cap stocks with a market cap too small for the S&P 500 or Nasdaq 100. This index tracks 2,000 of the smallest companies that trade on the NYSE and Nasdaq exchanges.
FTSE 100
The FTSE 100 tracks the 100 largest companies trading on the London Stock Exchange. It’s like the European equivalent of the S&P 500.
Buying a FTSE 100 index fund can be the easiest way to invest in European equities.
Nikkei 225
The Nikkei 225 tracks 225 of the largest companies on the Japanese stock exchange. Most Japanese stock index funds use the Nikkei as their benchmark.
Hang Seng
The Hang Seng is another popular Asian stock market index and it tracks up to 50 of the largest companies on the Hong Kong stock exchange.
How to Invest in the Stock Market
Investing in the stock market is relatively easy thanks to technology and minimum investing fees. Here’s a quick step-by-step guide to buying stocks.
Step 1: Open a Brokerage Account
The first step is opening a brokerage account and decide if you want to invest with a taxable account, Roth IRA or Traditional IRA.
You can also invest through an employer retirement plan like a 401k. However, your investment options might only include mutual funds and ETFs.
Most American platforms offer individual stocks and ETFs that trade on the Nasdaq and NYSE. However, most brokers don’t let you buy foreign stocks directly from international stock exchanges due to extra fees and complexities.
The internet makes it easy to connect with others worldwide, but international investing still has several barriers.
Instead, you will need to be the ADR or OTC version of a foreign individual stock or buy a foreign-focused stock fund.
Some of the basic investing apps with minimal features may not let you trade foreign stocks with an ADR or OTC stock symbol or stocks with a share price below $5. These stocks can be more volatile and can have extra transaction fees.
These traditional online brokerages can offer the most investment options:
- Charles Schwab
- E*TRADE
- Fidelity
- Interactive Brokers
- TD Ameritrade
- Vanguard
Each brokerage has its unique features and special investment products. Choose the one that’s best for you. Or, you can use a micro-investing app like Robinhood, M1 Finance or Webull too.
Step 2: Find Stocks and Funds
The next step is finding stocks and funds that fit your investment strategy. When you find an investment opportunity, you enter the number of shares you wish to buy.
Your broker will state the total share cost and any trade commissions. Agreeing to the investment costs means the broker will execute the trade request and buy shares from the stock exchange.
Most trades execute within a few seconds of clicking the buy or sell button. You receive credit for the shares immediately and the computer systems log the transaction and update the share price with the stock exchange.
Once the trade executes, you will receive a trade confirmation number. Its official name is a CUSIP number and it’s used for recordkeeping and tax purposes.
This number is visible proof that you own an equity stake in a company or stock fund. Even if you transfer brokers in the future, you can continue owning your shares until you decide to sell.
Step 3: Track Investment Value
After buying your shares, you can track the current share price on these online platforms:
- Broker website
- Stock exchange website
- Stock market news website (i.e., CNBC)
- Company website
This stock quote is the current value of a single stock share. However, you might pay a slightly higher price to buy new shares (bid price) and earn a few cents less than the stock quote when selling shares (ask price).
The difference between the buy and sell price is known as the bid-ask spread.
Summary
The stock market may have lots of moving parts that work behind the scenes that make it easy and cheap to trade stock. While investors use different brokerages to invest, they can get the same investment options and trading costs to build net worth with stocks.
While investing in the stock market can make you money, it’s important that you build a diversified portfolio of stocks so that you don’t “put all of your eggs into one basket,” as the saying goes. While we aren’t predicting a stock market crash it’s always a good thing to have diversity due to the market performance at various times.
Also consider adding other investment opportunities to include in your portfolio, even if on the smaller side, to continue to build wealth over time.