How the Stock Market Works

The stock market for beginners can be reduced to one idea: a share is part-ownership of a real business. When that business earns money, shareholders are entitled to a portion of it, whether it is paid out as a dividend or kept to grow the company. That link between price and profits is what separates a share from most crypto tokens, and it explains a lot about how share prices move.

The stock market for beginners: from company to share price

After a listing, the company does not receive money when shares change hands between investors. The price you see is simply the most recent agreement between a buyer and a seller on the exchange.

Exchanges and trading hours

Each exchange runs set sessions in its local time. The main New York session on NYSE and Nasdaq is 09:30 to 16:00. London runs from 08:00 to 16:30, Frankfurt's Xetra from 09:00 to 17:30, and Tokyo and Hong Kong pause for lunch. Outside those hours, prices largely stand still, then open wherever overnight news has pushed them.

For crypto users this is the biggest adjustment. A share cannot be sold on a Sunday afternoon; you wait for the next session like everyone else. The market board shows which exchanges are open now.

Brokers, custody and protection

You reach the market through a broker. A regulated broker keeps client assets separate from its own, so that if the firm fails the shares are still yours. Many countries add an investor compensation scheme that covers shortfalls up to a limit. Compare that with a crypto platform, where protection depends heavily on the jurisdiction and the platform's own arrangements.

Some apps offer share CFDs rather than real shares. A CFD tracks the price but gives you no ownership, no vote and usually a financing charge for holding it overnight. Our app comparison explains how to tell which you are buying.

How indices are built

An index is a basket of shares used to measure a market. The S&P 500 covers around 500 large US companies weighted by float-adjusted market value. The Dow Jones Industrial Average holds 30 companies weighted by share price. The Nikkei 225 is also price-weighted, while the FTSE 100, DAX and Nifty 50 use market value.

The weighting method changes which companies dominate. Take three illustrative companies:

The smallest company by value dominates the price-weighted index simply because its share price is high. In the market-value version, company C, the largest business, carries 58.8% of the weight. When you read that "the index" rose, it helps to know which kind of index it was.

Dividends and valuation, in three ratios

Share analysis leans on a handful of simple ratios. All figures below are illustrative for one company trading at $40.

• Market capitalisation = share price × shares issued. With 500 million shares at $40, the company is valued at $20 billion.
• Dividend yield = annual dividend ÷ share price. A $1.20 dividend on a $40 share is a 3% yield.
• Price-to-earnings (P/E) = share price ÷ earnings per share. With earnings of $2.50 a share, the P/E is 16.

Dividends follow a calendar. The company announces the amount, then sets an ex-dividend date: buyers on or after that date do not receive the payment, so the share price usually drops by about the dividend on that morning. The cash arrives on the payment date, sometimes weeks later. Some brokers offer to reinvest dividends automatically into more shares, which compounds the holding over time but still counts as income for tax purposes in many countries.

None of these tells you whether a share will rise. They let you compare companies on the same scale and ask sensible questions, such as why investors are willing to pay a higher multiple for one business than another.

Ways to own shares

You can hold the stock market in several forms, and each spreads risk differently.

Exchange-traded funds (ETFs) trade on an exchange like a share, so their price moves during the session. Funds charge an annual fee that is taken from the fund's value, which is easy to overlook because it never appears as a separate bill.

Reading a share quote

A share quote on a broker's screen usually shows a bid and an ask, the last traded price, the day's change and the day's range. For thinly traded shares the gap between bid and ask can be wide, which makes quick round trips expensive. Most exchanges also run an opening and a closing auction, short periods where orders are collected and matched at a single price, so the first and last prices of the day are set differently from the rest of the session.

Splits, buybacks and new shares

The number of shares a company has is not fixed. In a share split, each share becomes several cheaper ones; a two-for-one split halves the price and doubles the count, leaving your holding's value unchanged. In a buyback, the company buys its own shares and cancels them, so each remaining share represents a slightly larger slice of the business. In a new share issue, the reverse happens and existing holders are diluted unless they buy more. None of these changes the company's underlying value on the day, but all of them change what a single share represents.

Risks worth drawing out

• Single-company risk. One business can fail even when the market does well. Funds and indices spread that risk.
• Market risk. Whole markets can fall a long way and take years to recover.
• Currency risk. Buying foreign shares adds exchange-rate movement to the result, plus a conversion fee.
• Leverage. Share CFDs for UK and EU retail clients are capped at 5:1, which still means a 20% fall can erase the whole margin.

Costs matter too. Commissions, currency conversion and, for CFDs, overnight financing are covered in our guide to hidden costs.

Crypto habits that do not transfer

Three habits from crypto cause trouble with shares. First, round-the-clock trading: shares gap at the open, so a stop-loss is not a guaranteed exit. Second, self-custody: you normally cannot hold a listed share in your own wallet. Third, token supply thinking: shares can be issued or bought back, and both change what each share represents. Our market comparison lays out the other differences.

Sources

• US Securities and Exchange Commission, T+1 settlement cycle
• S&P Dow Jones Indices, index methodology documents
• European Securities and Markets Authority, CFD product intervention measures