What is the stock market?

How does the stock market work?

At its heart, the stock market is a marketplace. But instead of fruit or furniture, the goods being traded are company shares. These are small ownership stakes in businesses.

Companies that want to raise money list their shares on a stock exchange, like the London Stock Exchange or New York Stock Exchange. They do this through a process called an Initial Public Offering (IPO). Once listed, their shares can be bought and sold by investors.

You don’t always have to buy a full share if you don’t want to. These days, many platforms and apps allow you to invest in fractions of shares or through funds, which pool your money with other investors to spread the risk.

Behind the scenes, a network of banks, brokers and fund managers keeps the system running. They match buyers with sellers, helping keep markets fair and transparent.

What moves stock market prices?

Stock market prices are constantly changing. They can go up and down on a daily basis depending on lots of different factors. Some of the main ones include:

• Company performance – strong profits, new products or positive news, such as a major new partnership or industry award, can all push share prices up. The opposite is also true.‍
• Investor confidence – if people are optimistic about the economy, they might be more willing to invest. If there’s uncertainty, such as market volatility, they may be more hesitant to invest their money.‍
• Interest rates – when interest rates rise, saving becomes more attractive than investing. This can lead to falling share prices.‍
• Global events – things like wars, elections, pandemics or energy crises can all affect market confidence and prices.

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Put simply, stock market prices move because of supply and demand. If more people want to buy than sell, prices usually rise. When more want to sell, prices usually fall.

What’s a stock market index?

A stock market index is a way of tracking how a group of shares is performing. It gives you a snapshot of a specific area of the market or the market as a whole.

For example:

• The FTSE 100 tracks the 100 largest companies listed on the London Stock Exchange; and
• The S&P 500 tracks the 500 largest publicly traded companies in the United States.

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When people say the market is up or down, they’re often talking about how well one of these indices is doing. Stock indices make it easier to spot overall trends, even when individual company shares are moving in different directions.

Stock market vs. stock exchange

People sometimes use ‘stock market’ and ‘stock exchange’ to mean the same thing, but there’s an important difference:

• a stock market is the general marketplace where company shares are bought and sold; and
• a stock exchange is a specific platform or place, like the London Stock Exchange, where the trading happens.

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You can think of the stock market as the high street, and a stock exchange as a shop where the buying and selling takes place.