Definition: What 

is the stock market?

The term "stock market" often refers to one of the major stock market indexes,
such as the Dow Jones Industrial Average or the Standard & Poor's 500.
When you purchase a public company's stock, you're purchasing a small piece
of that company. Because it's hard to track every single company, the Dow
and S&P indexes include a section of the stock market and their performance
is viewed as representative of the entire market.
You’ll usually buy stocks online through the stock market, which anyone can
access with a brokerage account, robo-advisor or employee retirement plan.
You don’t have to officially become an “investor” to invest in the stock market
— for the most part, it’s open to anyone.
The stock market is regulated by the U.S. Securities and Exchange
Commission, and the SEC’s mission is to “protect investors, maintain fair,
orderly, and efficient markets, and facilitate capital formation."
You might see a news headline that says the stock market has moved lower, or
that the stock market closed up or down for the day. Most often, this means
stock market indexes have moved up or down, meaning the stocks within the
index have either gained or lost value as a whole. Investors who buy and sell
stocks hope to turn a profit through this movement in stock prices.

How does the stock market work?

The concept behind how the stock market works is pretty simple. The stock
market lets buyers and sellers negotiate prices and make trades.
The stock market works through a network of exchanges — you may have
heard of the New York Stock Exchange or the Nasdaq. Companies list shares
of their stock on an exchange through a process called an initial public offering,
or IPO. Investors purchase those shares, which allows the company to raise
money to grow its business. Investors can then buy and sell these stocks
among themselves, and the exchange tracks the supply and demand of each
listed stock.
That supply and demand help determine the price for each security, or the
levels at which stock market participants — investors and traders — are willing
to buy or sell.
Buyers offer a “bid,” or the highest amount they’re willing to pay, which is
usually lower than the amount sellers “ask” for in exchange. This difference is
called the bid-ask spread. For a trade to occur, a buyer needs to increase his
price or a seller needs to decrease hers.
This all may sound complicated, but computer algorithms generally do most
of price-setting calculations. When buying stock, you’ll see the bid, ask, and
bid-ask spread on your broker's website, but in many cases, the difference will
be pennies, and won’t be of much concern for beginner and long-term
investors.

How does the stock market work?

The concept behind how the stock market works is pretty simple. The stock
market lets buyers and sellers negotiate prices and make trades.
The stock market works through a network of exchanges — you may have
heard of the New York Stock Exchange or the Nasdaq. Companies list shares
of their stock on an exchange through a process called an initial public offering,
or IPO. Investors purchase those shares, which allows the company to raise
money to grow its business. Investors can then buy and sell these stocks
among themselves, and the exchange tracks the supply and demand of each
listed stock.
That supply and demand help determine the price for each security, or the
levels at which stock market participants — investors and traders — are willing
to buy or sell.
Buyers offer a “bid,” or the highest amount they’re willing to pay, which is
usually lower than the amount sellers “ask” for in exchange. This difference is
called the bid-ask spread. For a trade to occur, a buyer needs to increase his
price or a seller needs to decrease hers.
This all may sound complicated, but computer algorithms generally do most
of price-setting calculations. When buying stock, you’ll see the bid, ask, and
bid-ask spread on your broker's website, but in many cases, the difference will
be pennies, and won’t be of much concern for beginner and long-term
investors.

What is stock market volatility?

Investing in the stock market does come with risks, but with the right
investment strategies, it can be done safely with minimal risk of long-term
losses. Day trading, which requires rapidly buying and selling stocks based on
price swings, is extremely risky. Conversely, investing in the stock market for
the long-term has proven to be an excellent way to build wealth over time.
For example, the S&P 500 has a historical average annualized total return of
about 10% before adjusting for inflation. However, rarely will the market
provide that return on a year-to-year basis. Some years the stock market could
end down significantly, others up tremendously. These large swings are due to
market volatility, or periods when stock prices rise and fall unexpectedly.
If you’re actively buying and selling stocks, there’s a good chance you’ll get it
wrong at some point, buying or selling at the wrong time, resulting in a loss.
The key to investing safely is to stay invested — through the ups and the
downs — in low-cost index funds that track the whole market, so that your
returns might mirror the historical average.
How do you invest in the stock market?
If you have a 401(k) through your workplace, you may already be invested in
the stock market. Mutual funds, which are often composed of stocks
from many different companies, are common in 401(k)s.
You can purchase individual stocks through a brokerage account or an
individual retirement account like an IRA. Both accounts can be opened at an
online broker, through which you can buy and sell investments. The broker
acts as the middleman between you and the stock exchanges.

» No brokerage account? Learn how to open one. Online brokerages have

made the signup process simple, and once you fund the account, you can take
your time selecting the right investments for you.
With any investment, there are risks. But stocks carry more risk — and more
potential for reward — than some other securities. While the market's history
of gains suggests that a diversified stock portfolio will increase in value over
time, stocks also experience sudden dips.
To build a diversified portfolio without purchasing many individual stocks, you
can invest in a type of mutual fund called an index fund or an exchange-
traded fund. These funds aim to passively mirror the performance of an
index by holding all of the stocks or investments in that index. For example,
you can invest in both the DJIA and the S&P 500 — as well as other market
indexes — through index funds and ETFs.
Stocks and stock mutual funds are ideal for a long time horizon — like
retirement — but unsuitable for a short-term investment (generally defined as
money you need for an expense within five years). With a short-term
investment and a hard deadline, there's a greater chance you'll need that
money back before the market has had time to recover losses.

Key things to know about stocks

Investors who do best over the long term buy and hold. That means they
own a diversified portfolio of many stocks and hold on to them through good
times and bad.
Investing in individual stocks takes time. You should research each stock
you purchase, which includes a deep dive into the bones of the company and
its financials. Many investors opt to save time by investing in stocks through
equity mutual funds, index funds and ETFs instead. These allow you to
purchase many stocks in a single transaction, offering instant diversification
and reducing the amount of legwork it takes to invest.
There are two main types of stocks: common and preferred. Most
investors own common stock in a public company. Common stock may pay
dividends, but dividends are not guaranteed and the amount of the dividend
is not fixed.
Preferred stocks typically pay fixed dividends, so owners can count on a set
amount of income from the stock each year. Owners of preferred stock also
stand at the front of the line when it comes to the company’s earnings: Excess
cash distributed by dividend is paid to preferred shareholders first, and if the
company goes bankrupt, preferred-stock owners receive any liquidation of
assets ahead of common-stock owners.

Different Types of Stocks You Should Know

The main types of stock are common and preferred. Stocks are also
categorized by company size, industry, geographic location and style. Here's
what you should know about the different types of stock. A stock is an
investment into a public company. When a company sells shares of stock to
the public, those shares are typically issued as one of two main types of
stocks: common stock or preferred stock. Here’s a breakdown.
Common stock
If you’re new to investing in stock and looking to buy a few shares, you likely
want to invest in common stock, which is exactly what the name suggests: the
most common type of stock.
When you own common stock, you own a share in the company’s profits as
well as the right to vote. Common stock owners may also earn dividends — a
 payment made to stock owners on a regular basis — but those dividends are
typically variable and not guaranteed.
Preferred stock
The other main type of stock, preferred stock, is frequently compared to
bonds. It typically pays investors a fixed dividend. Preferred shareholders also
get preferential treatment: Dividends are paid to preferred shareholders before
common shareholders, including in the case of bankruptcy or liquidation.
Preferred stock prices are less volatile than common stock prices, which means
shares are less prone to losing value, but they’re also less prone to gaining
value. In general, preferred stock is best for investors who prioritize income
over long-term growth.
» Learn more: How to make money investing in stocks
Common vs. preferred stock
Common stock Preferred stock
Dividends are typically higher, fixed and guaranteed.
Potential for higher long-term return. Share price experiences less volatility.
ros
Voting rights. Preferred shareholders are more likely to recover at least part o
investment in case of bankruptcy.
Dividends, if available, are often lower,
variable and not guaranteed.
Stock price and dividend may experience Lower long-term growth potential.
ons
more volatility. No voting rights in most cases.
More likely to lose investment if the
company goes bankrupt.
est for Investors looking for long-term growth. Investors looking for income.

Other stock categories

Within those broad categories of common and preferred, different types of
stocks are further divided in other ways. Here are some of the most common:
Company size: You might’ve heard the words large-cap or mid-cap before;
they refer to market capitalization, or the value of a company. Companies are
generally divided into three buckets by size: Large cap (market value of $10
billion or more), mid-cap (market value between $2 billion and $10 billion) and
small-cap (market value between $300 million and $2 billion).
Industry: Companies are also divided by industry, often called sector. Stocks
in the same industry — for example, the technology or energy sectors — may
move together in response to market or economic events. That’s why it’s a
good rule of thumb to diversify by investing in stocks across sectors. (Just ask
someone who held a portfolio of tech stocks during the dot-com crash.)
Location: Stocks are frequently grouped by geographic location. You can
diversify your investment portfolio by investing not only in companies that do
business in the U.S., but also in companies based internationally and in
emerging markets, which are areas that are poised for expansion. (Here’s more
on how to invest in international stocks.)
Style: You might hear stocks described as growth or value. Growth stocks are
from companies that are either growing quickly or poised to grow quickly.
Investors are typically willing to pay more for these stocks, because they’re
expecting bigger returns.
Value stocks are essentially on sale: These are stocks investors have deemed to
be underpriced and undervalued. The assumption is these stocks will increase
in price, because they’re either currently flying under the radar or suffering
from a short-term event.