How the Stock Market Works

The stock market for beginners can look like a wall of tickers, but it rests on a simple arrangement. Companies sell pieces of themselves to raise money, and those pieces then change hands between investors on regulated exchanges. The price at any moment is just the last level at which a buyer and a seller agreed.

What a share gives you

A share is a unit of ownership. Holding one entitles you to a slice of the company's profits if it pays them out as dividends, to a vote at shareholder meetings on most ordinary shares, and to a share of what is left if the company is sold or wound up after its debts are paid. That link to real profits is why analysts can argue about what a share is "worth": they are estimating a stream of future earnings.

It also means shares can fall to zero. Shareholders are paid last, after lenders and suppliers, if a business fails.

Two markets in one: issuing and trading

Only the first sale, the listing, sends money to the company. After that, trading happens between investors, and the company's share price reflects what they think the business will earn.

Exchanges and their hours

Each exchange trades during its own weekday session, in local time:

The global trading day therefore starts in the Asia-Pacific region. The Asian stock market session, from Sydney and Tokyo through Hong Kong and India, is followed by Europe and then the Americas, and a big move in one region often sets the tone for the next. The live board on our home page shows which exchanges are open now.

How an order reaches the market

You place an order with a broker, and the broker sends it to an exchange or another trading venue. The two orders you will use most are:

• Market order: buy or sell now at the best price available. Fast, but the price is not fixed, which matters for thinly traded shares.
• Limit order: buy or sell only at your price or better. The price is controlled, but the order may never fill.

After the trade, cash and shares are exchanged at settlement. In the US that happens one business day after the trade date, a cycle known as T+1. Separately, the old US pattern day trader rule, with its $25,000 minimum for frequent day trading in margin accounts, was replaced by an intraday margin framework after the SEC approved FINRA's change on 14 April 2026; it took effect on 4 June 2026.

Indices: baskets with different recipes

An index tracks a basket of shares to show how a market or sector is moving. The S&P 500 covers about 500 large US companies weighted by free-float market value. The Dow Jones Industrial Average has 30 companies and is weighted by share price. The Nasdaq Composite includes all Nasdaq-listed stocks, while the Nasdaq-100 takes the largest non-financial ones. Elsewhere, the FTSE 100, the DAX with 40 German companies, the Nikkei 225, the ASX 200, the Nifty 50 and the 30-company Sensex play the same role.

The weighting method matters. Consider three made-up companies:

If X rises 10%, a price-weighted index of the three goes from 260 to 280, a gain of about 7.7%. A value-weighted index goes from $550bn to $560bn, a gain of about 1.8%. Same news, very different headline.

Dividends, splits and other company events

Companies that pay dividends announce an amount and an ex-dividend date. Buy before that date and you receive the payment; buy on or after it and the seller does. On the ex-date the share price usually drops by roughly the dividend, because that cash is leaving the company. A dividend is therefore a transfer of value to you, not free money.

A share split changes the number of shares without changing the company's value: in a two-for-one split you get twice as many shares at half the price. Other events include rights issues, where existing holders may buy new shares, and buybacks, where the company purchases its own shares. Your broker will notify you of events that need a decision.

What moves share prices

• Earnings and guidance: results compared with what investors expected, and what management says about the future.
• Interest rates: higher rates make future profits worth less today and raise borrowing costs.
• Sector and economic news: a change in commodity prices, regulation or demand can move a whole industry.
• Sentiment: fear and enthusiasm can push prices far from any sensible valuation for long periods.

Reading a company's results in five minutes

Listed companies publish results, usually every quarter or half-year, and a full annual report. For a first look, four numbers carry most of the story: revenue (sales), operating profit (what the business earns before interest and tax), earnings per share, and free cash flow (cash left after running and investing in the business). Compare each with the same period a year earlier rather than the previous quarter, since many businesses are seasonal. Then read the outlook statement, because the share price reacts as much to what management expects next as to what has already happened. Debt levels matter too: a company that owes a lot is more exposed when interest rates rise or sales slow.

Ways to hold shares

Buying shares outright through a broker gives you ownership and any dividends. Funds, including exchange-traded funds, hold a whole basket in one purchase, which spreads company-specific risk. Share CFDs are different: they track the price without giving ownership, are leveraged up to 5:1 for UK and EU retail clients, and carry overnight financing costs. In the UK, tax wrappers such as the ISA, with a £20,000 annual allowance for 2026/27, shelter gains and dividends from tax.

The costs of owning shares

Buying and selling shares can involve a broker commission, the spread between bid and ask, currency conversion for foreign shares and, in some countries, a tax on share purchases. Holding them can add a platform or custody fee and, for funds, an annual management charge taken from the fund's value. None of these is large on its own, but frequent trading multiplies the transaction costs. Our trading fees guide shows how to total them for a single trade.

The stock market for beginners: five common errors

1. Putting most of the money into one or two companies.
2. Trading often, so that spreads, commissions and currency conversion quietly eat the returns.
3. Forgetting that a share listed abroad adds exchange-rate risk.
4. Using leverage on shares before understanding what a gap at the open can do.
5. Reading a single day's index move as a trend.

Sources

• US Securities and Exchange Commission, T+1 settlement rule
• FINRA rule change on pattern day trading, approved by the SEC on 14 April 2026
• Published trading hours of NYSE, Nasdaq, LSE, Xetra, TSE, HKEX, ASX, NSE and BSE
• S&P Dow Jones Indices, FTSE Russell, Deutsche Börse, Nikkei and NSE Indices methodology documents
• HM Revenue & Customs, ISA allowances