How does the stock market work?
A stock market is a place where people buy and sell small pieces of companies. Everything else is detail — but the detail explains why prices move the way they do, and why they drift so far from what businesses are actually worth.
The one-sentence version
A stock market is a place where people buy and sell small pieces of companies. That's it. Everything else is detail about how the buying and selling is organised.
What you're actually buying
A share is a fraction of ownership in a real business. Own one share of a company with a hundred million shares and you own a hundred-millionth of it — a hundred-millionth of its buildings, its brands, its contracts, and a hundred-millionth of every pound of profit it makes from here on.
That last part is the bit beginners miss. The share isn't a betting slip whose value moves at random. It's a claim on the cash a business produces, which is why working out what that cash is worth is the whole of investing.
Where shares come from
The company sells them once
A business that wants to raise money can sell new shares to investors — a flotation, or IPO. The company receives that money and uses it. This happens rarely.
After that, investors trade with each other
Every trade you make afterwards is with another investor, not with the company. Buying Lloyds shares sends money to whoever sold them, not to Lloyds. The company isn't involved and doesn't receive a penny.
This is why a falling share price doesn't directly take money out of a business, and why a market fall can happen without anything changing at the companies inside it.
How a trade actually happens
You place an order with a broker. The broker sends it to an exchange — in the UK, usually the London Stock Exchange. The exchange matches your buy order with someone else's sell order at an agreed price. The whole thing takes a fraction of a second, and settlement, when the shares legally become yours, follows a day or two later.
Price is set by nothing more than what buyers and sellers agree at that moment. There is no committee deciding what a company is worth. That's precisely why prices can drift a long way from value in both directions — and why the gap is the opportunity.
How you make or lose money
The price changes
Sell for more than you paid and the difference is a capital gain. Sell for less and it's a loss. Nothing is realised until you sell.
Dividends
Many companies pay out part of their profit to shareholders, usually a few times a year. See dividend yield.
The business grows — or doesn't
Over long periods, share prices follow the earnings underneath them. Over short periods they follow mood. This distinction explains almost everything confusing about markets.
Indices, in plain English
The FTSE 100 is just a list of the hundred largest companies on the London exchange, with a number attached that summarises how their prices moved. The S&P 500 does the same for five hundred large US companies. An index isn't something you can buy directly — but a tracker fund holds all the constituents for you, which is how most people own one.
What it isn't
It isn't a casino, though it can be used as one. The difference is whether you're buying a business you've valued or a ticker you hope goes up. It also isn't zero-sum: when a company grows its profits over twenty years, the value created is real, and every shareholder can gain at once.
See what a business is worth, not just what it costs
Oak Growth values roughly 1,000 companies across eight markets and shows the gap against today's price — the difference between a share's price and its worth, in one number.
Explore Oak GrowthCommon questions
How does the stock market work in simple terms?
It's a marketplace where people buy and sell small ownership stakes in companies. A company sells shares once to raise money; after that, investors trade those shares with each other through brokers and an exchange, at whatever price buyers and sellers agree.
Do I own part of a company if I buy shares?
Yes. A share is a genuine fraction of ownership, giving you a claim on that proportion of the company's assets and future profits, and usually a vote at its annual meeting. Owning one share of a company with 100 million shares makes you a 100-millionth owner.
Does the company get my money when I buy its shares?
Only at a flotation, when new shares are first sold. Every trade after that is between investors, so your money goes to whoever sold you the shares, not to the company. That is why a share price falling doesn't directly remove money from a business.
What makes share prices go up and down?
Nothing more than what buyers and sellers agree at that moment. In the short run that is driven largely by sentiment and news; over long periods prices tend to follow the earnings the underlying businesses actually produce.
Also see: How can I start investing? → · What is an ETF? → · How to calculate intrinsic value →