A stock market is a place where investors trade shares of publicly traded companies in exchange for cash. A variety of people participate, from individual retail investors to large investment groups like pension funds and insurance companies. Mutual funds and exchange-traded funds also play a role, as do banks and other financial institutions. Robo-advisors, which automate investing for individuals, are also becoming a major part of the market.
Think of the stock market as a kind of matchmaker, matching buyers and sellers together on an open marketplace. People who want to buy a share of stock write a price “bid” and people who want to sell offer a price “ask.” If the bid and ask prices match, a trade is made. Buyers and sellers constantly negotiate new prices in response to the latest news and supply and demand.
For example, if the economy grows fast, that may boost demand for the stocks of technology firms that make smartphones and medicines. Or a company’s profits might grow unexpectedly, prompting shareholders to sell shares at a profit.
The stock market is a global network that’s protected by laws against fraud and other unfair trading practices. In addition to matching buyers and sellers, it provides important information about the health of the economy — or at least the most liquid parts of it — so that lenders can decide how much risk to take on mortgages or other loans. It also helps fund research into the next generation of technological advances — including self-driving cars and better cancer treatments — by providing investors with a steady stream of income from the companies they own.