The stock market can feel like an abstract casino, but underneath it is a straightforward marketplace where ownership of businesses changes hands. Understanding the plumbing, how shares are created, traded, and priced, demystifies the daily headlines. This guide walks through how it all fits together.
Shares and ownership
A share of stock represents a small ownership stake in a real company, entitling you to a portion of its profits and assets. Companies sell shares to raise money for growth, and in return investors get the chance to profit as the business does. Owning stock makes you a part-owner, not a lender. The market simply provides a place to buy and sell those ownership stakes.
Primary versus secondary markets
Shares first reach the public through the primary market, most often an initial public offering, or IPO, where the company sells new shares and receives the proceeds. After that, those shares trade among investors on the secondary market, the exchanges you hear about like the NYSE and Nasdaq, where the company itself is no longer the seller. Most trading you do happens on the secondary market. The company only raises money at issuance, not on every later trade.
How trades happen
When you place an order through a broker, it routes to an exchange where buyers and sellers are matched. Every stock has a bid, the highest price buyers will pay, and an ask, the lowest price sellers will accept, and the small gap between them is the spread. Market makers and other participants provide liquidity so trades fill quickly. Modern trades are executed electronically in fractions of a second.
What moves prices
A stock's price reflects the constant tug-of-war between buyers and sellers, which in turn reflects expectations about the company's future earnings. Good news, strong profits, or optimism push demand and prices up, while bad news does the reverse. Over the long run prices track business fundamentals, but in the short run emotion and headlines cause swings. No single force sets the price, because it emerges from millions of individual decisions.
A company goes public at $20 per share in its IPO, raising cash for expansion. From then on, its shares trade between investors on an exchange, and if strong earnings lift demand the price might climb to $28, a gain that flows to shareholders rather than the company.
Key takeaways
- A share is partial ownership of a company, not a loan to it.
- Companies raise money in the primary market via IPOs, then investors trade on the secondary market.
- Exchanges match buyers and sellers, quoting a bid, an ask, and the spread between them.
- Prices move with supply and demand, driven by expectations about future earnings.
- Long term, prices follow fundamentals, while short term they swing with sentiment.
Common mistakes
- Believing the company receives money every time its stock is traded.
- Reacting to short-term price swings as if they reflect permanent business changes.
- Confusing a stock's price with its value without checking the underlying earnings.
FAQ
Does a company get cash when I buy its stock?
Only at issuance, such as an IPO. On the secondary market your money goes to the investor selling the shares, not the company.
Why do prices change second to second?
Because buyers and sellers constantly update what they will pay and accept as new information and sentiment shift.