How Shares Are Created, Traded and Priced Every Day
The stock market works by connecting companies that want to raise money with investors who want to own a piece of those companies. Companies sell shares to the public, and those shares then trade between investors on exchanges such as the New York Stock Exchange and Nasdaq, with prices rising and falling based on supply, demand and expectations about each company’s future.
When you buy a share, you become a part-owner of the business. If the company grows and its profits rise, the value of your share can rise too, and many companies also pay part of their profits to shareholders as dividends.
Behind every trade sits a system of exchanges, brokers, market makers, clearing houses and regulators that keeps the market running fairly. This guide explains every part of it: how companies list, how a trade actually happens, what moves prices, what the indexes mean, how the market is regulated, what bull and bear markets are, and how ordinary investors can take part.
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For video explainers on the stock market and investing, the FRC Retail Investing video series covers these topics step by step. Most beginners invest in the market through funds rather than single stocks, and FRC’s ETF Investing for Beginners course explains how to do that with confidence.
FRC’s programs and memberships are open to everyone. The SIE Examination Preparation course covers how markets, products and regulation fit together, the same foundations taught to new Wall Street professionals.
A Brief History of the US Stock Market
The US stock market began informally in the late 1700s, when brokers in New York traded government bonds and shares of early banks. The Buttonwood Agreement of 1792 set the first rules for commissions and trading among a small group of brokers, the seed of what became the New York Stock Exchange.
Through the 1800s and early 1900s, the market grew with the railroads, steel companies and industrial giants of the era. The crash of October 1929 and the Great Depression that followed exposed widespread fraud and manipulation, leading Congress to create the modern system of federal securities regulation in 1933 and 1934.
Since then, the market has moved from paper certificates and shouting traders to electronic trading measured in microseconds. The arrival of discount brokers, online trading, commission-free apps and fractional shares has opened the market to more ordinary investors than ever before.
What a Stock Actually Is
A stock, also called a share or equity, represents a slice of ownership in a company. If a company has issued 100 million shares and you own 100, you own one millionth of the business.
Most shares traded by everyday investors are common stock. Common shareholders usually have voting rights on major company decisions and a claim on the company’s profits after all its debts and other obligations are paid.
Shareholders make money in two ways. The share price can rise as the company becomes more valuable, and the company may pay dividends, a share of its profits distributed in cash.
Why Companies Sell Shares
Companies sell shares to raise money without borrowing it. The money can fund new factories, research, hiring, acquisitions or expansion into new markets.
In exchange, the company gives up part of its ownership. Early founders and investors often sell shares to the public so they can turn part of their stake into cash, while the company gains capital to grow.
Being publicly traded also brings obligations. Public companies must publish detailed financial reports, disclose important events and follow strict rules designed to protect the investors who buy their shares.
The Primary Market: How Shares Are Born
New shares are created and sold in the primary market. The most familiar route is an initial public offering, or IPO, when a private company sells shares to the public for the first time.
In an IPO, the company works with investment banks, which help set the price, find buyers and manage the sale. Before the shares can be offered, the company must register the offering with the Securities and Exchange Commission and publish a prospectus describing its business, finances and risks.
Once the IPO is complete, the money from that first sale goes to the company. From then on, the shares trade between investors, and the company does not receive money from those later trades.
The Secondary Market: Where Investors Trade
The secondary market is what most people mean when they talk about the stock market. It is where investors buy and sell existing shares with each other, millions of times every trading day.
When you buy shares of a large company through your brokerage app, you are almost always buying them from another investor, not from the company itself. The company’s share price reflects what buyers and sellers agree a share is worth at that moment.
The secondary market gives investors liquidity, meaning they can turn their shares back into cash quickly. That ability to sell is a large part of why people are willing to invest in the first place.
The Stock Exchanges
A stock exchange is a regulated marketplace where buy and sell orders meet. The two largest in the United States, and in the world, are the New York Stock Exchange and Nasdaq.
The New York Stock Exchange traces its origins to the Buttonwood Agreement of 1792, signed by 24 brokers under a buttonwood tree on Wall Street. It combines electronic trading with a trading floor, where designated market makers help maintain orderly trading in each listed stock.
Nasdaq launched in 1971 as the world’s first electronic stock market. It is home to many of the largest technology companies, while both exchanges list companies from every industry.
Other Trading Venues
Not every trade happens on an exchange. A large share of US stock trading takes place on alternative trading systems, sometimes called dark pools, and through wholesale market makers that fill orders from retail brokers.
These venues compete with the exchanges to offer fast execution and good prices. Federal rules require brokers to seek the best execution reasonably available for their customers’ orders, wherever they are routed.
For most individual investors, the routing happens invisibly in a fraction of a second. Your broker must disclose how it routes orders and whether it receives payment for sending orders to particular market makers.
How a Trade Actually Happens
When you place an order through a brokerage account, your broker sends it to an exchange or other venue to be matched with an order on the other side. Every stock has a bid, the highest price a buyer is offering, and an ask, the lowest price a seller will accept.
The gap between them is the bid-ask spread. For heavily traded large companies, the spread is often just a penny, while for smaller, less traded stocks it can be much wider.
Market makers stand ready to buy and sell continuously, earning a small profit from the spread. Their constant presence is what lets an investor buy or sell almost instantly during market hours.
Order Types Every Investor Should Know
A market order buys or sells immediately at the best available price. It almost always executes, but the exact price can differ slightly from the last quote, especially in fast-moving markets.
A limit order sets the maximum price you will pay when buying or the minimum you will accept when selling. It gives you control over price, but it may not execute if the market never reaches your limit.
A stop order becomes a market order once a set price is reached, and is often used to limit losses. Orders can also be set to last for one day or until cancelled, and most long-term investors buying broad funds use simple market or limit orders.
What Happens After the Trade: Clearing and Settlement
Once your trade executes, it still has to be completed. Clearing confirms the details of the trade, and settlement is the actual exchange of cash for shares.
Since May 28, 2024, most US stock trades settle one business day after the trade, a cycle known as T+1. Before that, settlement took two business days.
Behind the scenes, the Depository Trust and Clearing Corporation acts as the central clearing house and depository for US securities. It stands between buyers and sellers, guaranteeing that trades are completed even if one side fails.
Worked Example: Following One Trade
Imagine you open your brokerage app at 10:15 a.m. on a Tuesday and place a market order to buy 10 shares of an S&P 500 ETF. The current bid is $500.00 and the ask is $500.02, so your order is likely to fill at or near $500.02 a share.
Your broker routes the order to an exchange or a market maker, where it is matched with a seller within a fraction of a second. You see the purchase in your account almost immediately, at a total cost of about $5,000.20 with no commission at most major brokers.
Under T+1 settlement, the cash and shares formally change hands on Wednesday. From that point, the shares are held in your name through your broker, protected by SIPC up to its limits if the firm were ever to fail.
When the Market Is Open
The main US stock exchanges are open from 9:30 a.m. to 4:00 p.m. Eastern Time, Monday through Friday, except on market holidays. These are known as regular trading hours.
Many brokers also offer pre-market and after-hours trading. Prices in these sessions can be more volatile and spreads wider, because fewer buyers and sellers are active.
Major market holidays include New Year’s Day, Martin Luther King Jr. Day, Presidents Day, Good Friday, Memorial Day, Juneteenth, Independence Day, Labor Day, Thanksgiving and Christmas. On a few days, such as the day after Thanksgiving, the market closes early.
What Moves Stock Prices
In the short term, stock prices move with supply and demand. If more investors want to buy a stock than sell it, the price rises, and if more want to sell, it falls.
Over the long term, prices tend to follow a company’s earnings and expected future profits. A widely used measure is earnings per share, the company’s profit divided by its number of shares, and investors compare a stock’s price to its earnings to judge whether it looks expensive or cheap.
The wider economy plays a big part too. Interest rates, inflation, employment, consumer spending and global events all shift expectations about future profits, which is why the whole market can rise or fall together on a single piece of news.
Dividends, Record Dates and Stock Splits
When a company declares a dividend, it sets a record date and an ex-dividend date. To receive the dividend, you must own the shares before the ex-dividend date, and buyers on or after that date do not receive it.
Because the dividend is leaving the company, the share price usually drops by roughly the dividend amount on the ex-dividend date. FRC’s guide to when VOO pays dividends shows how this works for one of the most popular ETFs.
Companies sometimes carry out a stock split, such as turning each share into four shares at a quarter of the price. A split does not change the value of your holding or the company, but it makes each share cheaper to buy.
Market Capitalization
A company’s market capitalization, or market cap, is its share price multiplied by the number of shares outstanding. A company with 1 billion shares trading at $50 has a market cap of $50 billion.
Market cap is used to group companies by size. Large-cap companies are generally the biggest and most established, while mid-cap and small-cap companies are smaller and can grow faster but tend to be more volatile.
The largest US companies by market cap are worth trillions of dollars. Their size gives them a heavy influence on the major indexes that track the market, so a strong or weak day for a handful of giants can move the whole index.
Stock Market Indexes
An index tracks the performance of a group of stocks, giving a single number that sums up how part of the market is doing. When the news says “the market rose today,” it is usually referring to one of the major indexes.
The S&P 500 tracks 500 of the largest US companies and is weighted by market cap, so larger companies have more influence. The Dow Jones Industrial Average tracks 30 major companies and is weighted by share price, while the Nasdaq Composite includes thousands of companies listed on Nasdaq.
FRC’s guides to S&P 500 vs Nasdaq, Dow Jones vs S&P 500 and Dow Jones vs Nasdaq explain how each index is built and why they move differently.
Bull Markets and Bear Markets
A bull market is a period of rising prices and optimism. A bear market is commonly defined as a decline of 20% or more from a recent high, usually accompanied by pessimism and economic worry.
A correction is a smaller decline, commonly defined as a fall of 10% or more. Corrections are a normal feature of the market and happen far more often than bear markets.
Over its history, the US stock market has gone through many bear markets, from the Great Depression to the 2008 financial crisis and the sharp fall of early 2020. Each was followed by recovery and new highs over time, although some recoveries took years.
Circuit Breakers: The Market’s Emergency Brakes
To prevent panic from spiraling out of control, US markets use market-wide circuit breakers based on falls in the S&P 500 during the trading day. A decline of 7% triggers a Level 1 halt, and a decline of 13% triggers a Level 2 halt, each pausing trading across the market for 15 minutes if it happens before 3:25 p.m. Eastern Time.
A decline of 20% triggers a Level 3 halt, stopping trading for the rest of the day. These pauses give investors time to absorb information and reduce the risk of disorderly selling.
Individual stocks also have their own limit up and limit down bands. If a single stock moves too far too fast, trading in it is briefly paused.
Who Regulates the Stock Market
The Securities and Exchange Commission, or SEC, is the federal agency that oversees the US securities markets. It was created by the Securities Exchange Act of 1934 after the 1929 crash, with a mission to protect investors, maintain fair and orderly markets and facilitate capital formation.
FINRA, the Financial Industry Regulatory Authority, is a self-regulatory organization overseen by the SEC. It writes and enforces rules for brokerage firms and their registered representatives, licenses industry professionals and runs BrokerCheck.
The exchanges themselves also set listing standards and monitor trading. Together, these layers of oversight are designed to make the US market one of the most transparent and closely regulated in the world.
The Rules That Protect Investors
Public companies must file regular reports with the SEC, including annual and quarterly financial statements, so investors can see how they are performing. Insiders who trade their company’s shares must report those trades publicly.
Insider trading, which means trading on important information that the public does not have, is illegal. So is market manipulation, such as spreading false information to move a stock’s price.
Brokerage firms must hold customer securities separately from their own and keep enough capital to meet their obligations. If a member firm fails, the Securities Investor Protection Corporation protects customer accounts up to $500,000, including up to $250,000 in cash, for assets that go missing.
Who Trades in the Stock Market
The market brings together a wide range of participants. Individual investors, often called retail investors, buy and sell through brokerage accounts and retirement plans.
Institutional investors, such as mutual funds, pension funds, insurance companies, hedge funds and endowments, manage enormous pools of money and account for a large share of trading. High-frequency trading firms use powerful computers to trade in fractions of a second.
Companies themselves also participate. Many buy back their own shares through a share repurchase, reducing the number of shares outstanding and returning money to shareholders.
Making Money From the Stock Market
Investors earn returns from price growth and from dividends. Over long periods, the broad US market has historically delivered average annual returns in the high single digits, though individual years range from strong gains to steep losses.
Reinvesting dividends has historically made up a meaningful part of the market’s total return. When dividends buy more shares, those shares produce more dividends, compounding over time.
FRC’s guide to how compound interest builds wealth in ETFs shows the effect with worked examples. Time in the market, rather than timing the market, is what lets compounding work.
The Risks of the Stock Market
Stocks can fall sharply, and individual companies can lose most or all of their value. A single stock is exposed to company-specific risks, such as a failed product, a scandal or a competitor taking over its market.
The whole market can also decline at once during recessions, financial crises or periods of rising interest rates. This market-wide risk cannot be removed by owning more stocks.
Investors manage these risks by diversifying, holding a mix of investments suited to their timeline, and avoiding money they will need soon. Some also try to profit from falling prices through short selling, a high-risk strategy that is generally unsuitable for beginners.
How Ordinary Investors Take Part
Most people access the stock market through a brokerage account, an individual retirement account or a workplace plan such as a 401(k). FRC’s guides to what a brokerage account is and how a 401(k) works explain the options.
Rather than picking individual stocks, many investors buy index funds or ETFs that hold hundreds or thousands of companies in a single purchase. This gives instant diversification at very low cost.
FRC’s guide to how to invest in the S&P 500 shows one of the most popular ways to own the market. FRC’s comparison of VOO vs VTI vs QQQ explains three of the most widely held ETFs.
Individual Stocks vs Funds
Buying individual stocks lets you choose exactly which companies you own, and a successful pick can deliver large gains. It also concentrates risk, requires research and exposes you to the possibility of a single company performing badly.
Funds spread your money across many companies, so the failure of any one has a small effect. They also remove the need to research and monitor dozens of individual businesses.
Many investors combine the two, holding a core of broad funds with a smaller portion in individual stocks they believe in. FRC’s Investing for Beginners guide explains how to build that kind of foundation step by step.
Common Myths About the Stock Market
One common myth is that the stock market is a casino. Unlike gambling, owning shares gives you a claim on real businesses that produce goods, services and profits, and over long periods the market has rewarded patient investors.
Another myth is that you need a lot of money to start. Fractional shares and funds with no minimums mean anyone can begin with a small amount.
A third myth is that you need to time the market to succeed. Even professional investors struggle to predict short-term moves consistently, which is why steady, regular investing is the approach most long-term investors rely on.
A fourth myth is that a falling market means you have lost money for good. A loss on paper becomes permanent only if you sell, and investors who held diversified portfolios through past bear markets have historically seen them recover over time.
Keep Learning
Understanding how the stock market works removes much of the fear around investing. Once you know how shares are created, how trades happen and how the market is regulated, the daily headlines become far easier to put in context.
The FRC dictionary is more than a dictionary. It is a library of explainer videos, written explanations and on-page quizzes, so you can open any term, such as designated market maker, and go deeper whenever something is unclear.
FRC’s programs and memberships are open to everyone, from first-time investors to people building careers on Wall Street. Structured learning turns market jargon into knowledge you can use.
Your Next Step
The stock market lets companies raise money by selling shares and lets investors buy and sell those shares every trading day on regulated exchanges. Prices move with supply, demand, company earnings and the economy, while the SEC, FINRA and the exchanges keep the system fair and transparent.
You do not need to master every detail to take part. Open an account with a regulated firm, start with diversified funds, invest regularly and give your money the time it needs to grow.
