Stock Market Basics: How the Market Works

What Is the Stock Market?

The stock market is a collection of exchanges where shares of publicly traded companies are bought and sold. When a company "goes public" through an initial public offering (IPO), it sells shares to investors, and those shares then trade on an exchange. After the IPO, the company does not directly profit from share price changes — the trading happens between investors.

Think of the stock market as a giant marketplace. Sellers offer shares at a price they are willing to accept, buyers bid at a price they are willing to pay, and when the two agree, a trade happens. This process occurs millions of times per day across the world.

How Stock Exchanges Work

A stock exchange is the organized platform where buying and selling takes place. The two largest exchanges in the United States are the New York Stock Exchange (NYSE) and NASDAQ. Globally, major exchanges include the London Stock Exchange (FTSE), Tokyo Stock Exchange (Nikkei), Frankfurt Stock Exchange (DAX), and others.

Each exchange has listing requirements that companies must meet to have their shares traded there. These requirements cover minimum market capitalization, financial reporting standards, corporate governance, and other criteria. Being listed on a major exchange signals a certain level of size and transparency.

Bids, Asks, and the Spread

Every stock has two prices at any given moment: the bid (the highest price a buyer is currently willing to pay) and the ask (the lowest price a seller is currently willing to accept). The difference between these two prices is called the spread.

For heavily traded stocks like Apple or Microsoft, the spread is usually just a penny. For thinly traded small-cap stocks, the spread can be much wider. The spread matters because it represents an immediate cost of trading — if you buy at the ask and immediately sell at the bid, you lose the spread amount.

Market makers (firms that commit to continuously quoting bid and ask prices) help keep spreads narrow and provide liquidity so that trades can be executed quickly.

Types of Orders

When you want to buy or sell a stock, you place an order through your broker. The type of order determines how and at what price the trade executes:

• Market order — Buy or sell immediately at the best available price. Fast execution but you don't control the exact price.
• Limit order — Buy or sell only at a specific price or better. You control the price but the order might not fill if the stock doesn't reach your level.
• Stop order (stop loss) — Becomes a market order once the stock reaches a specified trigger price. Used to limit losses or protect profits.
• Stop-limit order — Like a stop order but becomes a limit order instead of a market order. Gives you price control but may not fill in fast-moving markets.

Market Hours and Sessions

U.S. stock markets operate from 9:30 AM to 4:00 PM Eastern Time on weekdays. This is the "regular session" with the most liquidity and the tightest spreads. Many brokers also offer access to pre-market (4:00–9:30 AM) and after-hours (4:00–8:00 PM) sessions, though these have lower volume and wider spreads.

International markets have their own hours. The Tokyo exchange opens when the U.S. market is closed, and European markets overlap with the beginning of the U.S. session. This creates a 24-hour cycle of global market activity that can influence prices across regions.

What Moves Stock Prices

At the most fundamental level, stock prices move because of changes in supply and demand. If more people want to buy a stock than sell it, the price rises. If more people want to sell, the price falls. But what causes those shifts?

• Earnings reports — Quarterly results that beat or miss analyst expectations often cause significant price moves.
• Economic data — Employment numbers, GDP growth, inflation, and interest rate decisions affect entire markets.
• Company news — New products, management changes, mergers, lawsuits, and other events impact individual stocks.
• Market sentiment — Fear and greed can move prices independent of fundamentals, especially in the short term.
• Sector rotation — Money flows between sectors based on economic cycles and investor preferences.

Technical analysis, which Scanance focuses on, studies the resulting price and volume patterns rather than the underlying causes. The theory is that all available information is already reflected in the price, so analyzing the price itself is sufficient for short- to medium-term trading decisions.

Indexes and Benchmarks

A stock market index tracks the performance of a group of stocks to represent a segment of the market. The S&P 500 tracks the 500 largest U.S. companies, the Dow Jones Industrial Average follows 30 major blue-chip stocks, and the NASDAQ Composite includes over 3,000 stocks listed on the NASDAQ exchange.

Indexes serve as benchmarks — a standard against which investors measure the performance of their own portfolios. When someone says "the market was up 1% today," they are usually referring to a major index like the S&P 500.

Getting Started as a Beginner

If you are new to the stock market, here is a practical starting path:

1. Open an account with a reputable, commission-free broker.
2. Start by learning how to read basic price charts and understand daily candles.
3. Use a stock screener like Scanance to identify stocks showing technical signals.
4. Paper trade (practice without real money) for several weeks to test your understanding.
5. Start trading with a small amount of real capital, keeping strict risk management rules.
6. Keep a trading journal to track what works and what does not.

The stock market rewards patience and discipline more than intelligence or speed. Take your time learning the basics, and build your skills gradually before committing significant capital.