The stock market is a place for anyone to buy or sell fractional ownership of a publicly traded company. It distributes the financial rewards of big companies among hundreds of millions of investors, and it allows you to invest in an industry you love or a cause you believe in. It can be a great tool for saving for retirement or other goals that span years, because short-term volatility generally smoothes into an overall upward trend, and many stocks pay dividends, which can boost your returns.
Large and small market-level factors, such as inflation or interest rates, can make certain stocks rise or fall more than others. But most of the time, stocks rise and fall because of what investors think will happen in the future. For example, tax cuts can encourage investment and spur growth; but high unemployment may discourage it and hurt corporate profits, which in turn can push or pull stock prices up or down.
A trade on a stock exchange is conducted by matching a potential seller with a buyer using the highest available bid and ask price for that stock at that moment. Each exchange tracks the supply and demand of individual securities, maximizing fairness for both buyers and sellers.
In addition to buying and selling individual stocks, the stock market also has more advanced trading tools, such as short selling (selling shares you don’t own), margin buying (buying a share with borrowed funds) and derivatives (which let traders control large blocks of stock for less money than they would require to purchase them outright). Most investors are best served by taking a buy-and-hold approach, and building a diversified portfolio that matches their investment risk tolerance and investment horizon.
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