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Investing & Markets
Stock Market Basics: How It Works and How to Get Started
The stock market can seem intimidating to beginners. Learn how exchanges work, what drives prices, common order types, and how to avoid typical first-time mistakes.
Stock Market Basics: How It Works and How to Get Started
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What the Stock Market Is
- The stock market is a network of exchanges where shares of public companies are traded
- Buying stock means owning a small piece of a company and its future earnings
- Markets provide liquidity, the ability to convert investments to cash relatively quickly
- Most investors never interact directly with exchanges, brokers route orders on your behalf
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Full Guide
What the Stock Market Is
- The stock market is a network of exchanges where shares of public companies are traded
- Buying stock means owning a small piece of a company and its future earnings
- Markets provide liquidity, the ability to convert investments to cash relatively quickly
- Most investors never interact directly with exchanges, brokers route orders on your behalf
Major Exchanges and How Prices Work
- The NYSE is the largest exchange by market capitalization of listed companies
- NASDAQ is fully electronic and home to many technology and growth companies
- Prices are set by supply and demand, company earnings and sentiment drive demand
- Short-term prices reflect sentiment; long-term prices track business fundamentals
Order Types Explained
- Market orders execute immediately at the best available price, fast but price uncertain
- Limit orders set a maximum buy or minimum sell price, price guaranteed, execution is not
- Stop-loss orders trigger a market sell if the price falls to a specified level
- Stop-limit orders combine a trigger price with a limit for more control
Market Hours, Settlement, and Indices
- Regular US market hours are 9:30 AM to 4:00 PM Eastern, Monday through Friday
- Stock trades settle on T+1, one business day after the trade date
- The S&P 500 tracks 500 large US companies and is the most widely followed benchmark
- You cannot invest directly in an index, index funds and ETFs replicate their performance
Bull Markets, Bear Markets, and Market Cap
- A bull market is a sustained 20%+ gain from a low; a bear market is a 20%+ decline
- Bear markets have historically lasted 9-16 months on average before recovery
- Market cap equals share price times shares outstanding, it measures total market value
- Large-cap (over $10B), mid-cap ($2-10B), and small-cap (under $2B) behave differently
How to Open a Brokerage Account
- Major online brokers offer commission-free stock and ETF trading with no minimums
- You will need your Social Security number, government ID, and bank account to fund it
- Choose between a taxable brokerage account and tax-advantaged accounts like IRAs
- Compare platforms on research tools, customer service, and available investment options
Common Mistakes for Beginners
- Trying to time the market, time in the market has historically beaten timing
- Concentrating in a single stock or sector instead of diversifying broadly
- Panic selling during downturns, bear markets are normal and recoveries always follow
- Ignoring fees, taxes, and the impact of frequent trading on long-term returns
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