How the Stock Market Works

The stock market for beginners can look like a wall of tickers and flashing numbers, but underneath it is one simple idea. Companies divide their ownership into shares, and a stock market lets people who own those shares sell them to people who want them. If you already know a little about crypto, the key difference is that a share is a legal claim on a real business, with rights written into company law.

What you own when you own a share

A company with 10 million shares in issue is split into 10 million equal pieces. Owning one of them gives you a tiny fraction of the business and, usually, three things:

• A claim on profits. Some companies pay part of their profit to shareholders as dividends. Others keep it to grow.
• A vote. Ordinary shareholders can vote on matters such as electing directors.
• A place in the queue. If the company is sold, shareholders are paid; if it fails, they come last, after lenders and suppliers, and often receive nothing.

That last point matters. A share can go to zero, and some do.

Where shares are bought and sold

When a company first sells shares to the public, it is called an initial public offering, or listing. After that, the shares are traded between investors on a stock exchange. Large exchanges include the New York Stock Exchange and Nasdaq in the United States, the London Stock Exchange, Germany's Xetra, the Tokyo Stock Exchange and Hong Kong Exchanges.

Each has fixed trading hours in local time. In New York the main session runs from 09:30 to 16:00 on weekdays; London trades from 08:00 to 16:30; Tokyo breaks for lunch between 11:30 and 12:30. Outside those hours prices do not move on the exchange, which is why a share can open at a very different price from where it closed.

Shares that do not meet an exchange's listing standards may trade over the counter, through dealer networks with lighter disclosure. That is the world of many penny stocks.

How you actually buy a share

Individuals do not deal with an exchange directly. You use a licensed broker, which takes your order, sends it to the market and then holds the shares for you. In many countries the broker keeps client shares in a nominee account, legally separate from its own assets, so that a broker failure does not mean your shares disappear. Many countries also run investor compensation schemes that cover some losses if a broker fails and client assets are missing.

US share trades now settle one business day after the trade date, a cycle known as T+1. Settlement is when ownership and cash formally change hands.

How share prices are set

A share's price is simply the most recent price at which a buyer and seller agreed. Behind those decisions sit expectations about the company's future profits, the interest rates available elsewhere, the state of the economy and plenty of mood. When a company reports results better than investors expected, the price often rises; worse, and it often falls, sometimes by a large amount in one day.

Two measures come up often. Market capitalisation is the share price multiplied by the number of shares, a quick way of stating a company's size. The price-to-earnings ratio divides the share price by profit per share; a high figure means investors are paying a lot for each unit of current profit, usually because they expect growth.

A worked example

The numbers are illustrative. You buy 40 shares at $25 each, spending $1,000 before costs. The company pays a dividend of $0.60 per share over a year.

• Dividend income: 40 × $0.60 = $24, which is 2.4% of what you paid.
• If the price rises to $28: 40 × $3 = a $120 gain on paper, or 12%.
• If the price falls to $22 instead: 40 × $3 = a $120 loss on paper, and the dividend only softens it.

Taxes and dealing costs would change these numbers, and both vary by country and account type.

Placing an order for shares

When you buy through a broker, you choose an order type. A market order buys at the best price available now, which is fine for large, busy shares but can be costly in thinly traded ones. A limit order sets the most you will pay; it may not fill, but you will never pay more than you chose. Some brokers also let you set a stop order to sell automatically if the price falls to a set level.

Orders placed while the exchange is closed usually wait for the next session, so the price you get may differ from the last price you saw. Checking the spread before you trade tells you how much it costs to buy and sell straight away.

Indices: measuring the whole market

An index tracks a group of shares so that you can see how a market is doing in one number. The S&P 500 follows around 500 large US companies, weighted by the value of their freely traded shares. The Dow Jones Industrial Average holds just 30 companies and is weighted by share price, not size. The FTSE 100 covers the largest companies on the London Stock Exchange; the DAX tracks 40 large German firms and includes reinvested dividends; the Nikkei 225 is a price-weighted Japanese index; India's Nifty 50 and Sensex follow 50 and 30 companies.

Funds that track an index let an investor own a small piece of every company in it in one purchase, which spreads the risk of any single firm failing.

Investing and trading are different activities

Buying shares and holding them for years, collecting dividends and accepting ups and downs, is usually called investing. Buying and selling within days or hours to profit from price swings is trading. Trading involves more decisions, more costs and, often, leverage through products such as contracts for difference. In the UK and EU, retail leverage on individual share CFDs is capped at 5:1.

In the United States, the old $25,000 minimum for pattern day traders has been replaced: the SEC approved FINRA's new approach in April 2026, and since June 2026 intraday margin requirements apply instead. Other countries have their own rules.

Risks worth naming

• Company risk: a single business can lose customers, take on too much debt or fail.
• Market risk: whole markets can fall together in a recession or financial crisis, taking good companies with them.
• Currency risk: shares priced in another currency can lose value when converted back, even if the price in their own currency is unchanged.
• Concentration risk: putting most of your money into one or two companies magnifies all of the above.

Costs to look for

• Dealing commission per trade, which some brokers have cut to zero while earning in other ways.
• The spread between the buying and selling price, which is wider for small, rarely traded companies.
• Currency conversion when buying shares priced in another currency.
• Account or platform fees, which may be a flat amount or a percentage of your holdings.
• Taxes, including stamp duty in some countries and tax on dividends and gains.

The trading fees lesson shows how to add these together, and our platform checklist explains how to check a broker's authorisation.

A beginner's order of play

1. Understand what a share is and the fact that it can fall to nothing.
2. Learn how an index spreads risk across many companies.
3. Check a broker's authorisation and how it holds client assets.
4. Add up the full cost of buying, holding and selling.
5. Decide how long you intend to hold, before you buy.

Sources

• US Securities and Exchange Commission, T+1 settlement cycle
• FINRA, intraday margin rule replacing the pattern day trader requirement (approved April 2026)
• UK Financial Conduct Authority, CFD rules for retail clients