Your turn
Each lab is one step from the video. Slide, tap and flip, and watch the price move.
Each lab isolates one idea. The company and shops are a made-up toy model; the decade returns are real (OpenStax, Table 17.2). This explains how markets work; it isn't investment advice.
Slide the sliders and tap the pictures.
How many $10 shares must you sell to pay for a $1,000 factory?
At the IPO the company itself receives the cash: 100 shares × $10.
Slide to sell pieces. Can you fill up the factory money?
Raise the buyer’s bid. At what price does the trade happen?
A trade executes only when the bid reaches the ask. The gap before that is the spread.
Slide until the buyer pays enough.
Add buyers or sellers. Which way does the price go?
More buyers than sellers pushes the price up; more sellers pushes it down.
Add more buyers. What happens to the price?
Flip a card. Does the news make people expect more profit, or less?
New information moves the price by changing what investors expect the company to earn. In this lab, news is the only thing that changes.
Tap the button for news. Does the price go up or down?
Push the lemonade price down. Can the index still go up?
A simple average: one stock can fall while the index rises.
Real indexes like the S&P 500 weight companies by market capitalization; this toy uses a simple average.
Which decade was best? Which one lost money?
Average annual total return per decade, 1950s–2010s. Past returns guarantee nothing.
Source: OpenStax Principles of Economics 3e, Table 17.2. Not investment advice.
The stock market is a place where people buy and sell little pieces of companies. Each piece is called a share.
Pretend you have a lemonade stand in the park. You want a big factory, but it costs a lot. So you cut your company into little pieces and sell them. Your friends buy the pieces, and their money helps build the factory!
Later, people swap shares with each other. One person pays money, and the other person gives a share. They have to agree on a price first.
When lots of people want a share, the price goes up. When lots of people want to sell, the price goes down. Good news, like a hot summer, makes people want to buy. Bad news, like no lemons, makes people want to sell.
Prices go up and down. Sometimes they fall a lot, and people can lose money. So people put their money in lots of different companies. Don't put all your eggs in one basket!
A stock (or share) is a tiny slice of ownership in a company.1 Companies sell shares to raise money for things like new products, new buildings or paying off debt.1 After that first sale, investors buy and sell those shares with each other on a stock exchange, such as the New York Stock Exchange or Nasdaq.24 The price of a share is simply what a buyer and a seller agree on. If more people want to buy than sell, it goes up; if more want to sell, it goes down.5 People decide what to pay based on how much they expect the company to earn in the future, which is why news moves prices every day.7
This page explains how markets work; it isn't financial advice. The lemonade company in the explainer is made up.
Imagine a lemonade stand that wants to build a $1,000 factory. The owner could borrow the money, or split the company into 100 shares and sell each one for $10. Whoever buys a share becomes a part-owner. Real companies do exactly this; a person who owned 100% of a company's stock would own the whole company, but in big, well-known firms no single person usually owns most of the shares.2
Owning stock can pay you back in two ways:19
Common stock usually also lets you vote at shareholder meetings.1 The catch: if the company goes bankrupt, common shareholders are last in line to be paid, and may get nothing.1
When a company first sells shares to the public, that's called an initial public offering (IPO).3 This is when the company actually receives cash for its shares (it can also sell new shares later).2 After that, almost every trade is between investors. If you buy a share on an exchange, you buy it from the person who already owns it, and the company gets none of your money, just as a house builder doesn't get paid when a house is resold.2
Stock markets grew out of small meetings of people who wanted to buy and sell shares and found it easier to do it in one place.5 Today an exchange can be a physical place, like the New York Stock Exchange (NYSE) on Wall Street in Manhattan, or completely electronic, like the Nasdaq Stock Market, where computers connect buyers and sellers.4 Regular U.S. exchange trading hours are 9:30 a.m. to 4:00 p.m. Eastern Time.21
To buy, you place an order through a broker, who sends it to an exchange.5 Two prices matter:
| Word | What it means | Lemonade example |
|---|---|---|
| Bid | The highest price a buyer is offering | "I'll pay $9." |
| Ask (offer) | The lowest price a seller will accept | "I want $11." |
| Spread | The gap between bid and ask22 | $2 |
| Trade | Happens when a buyer and seller agree on the same price5 | Bid rises to $11 → sold! |
The bid is almost always lower than the ask, because buyers want the lowest price and sellers want the highest.522 The last price where they met is the "price" you see quoted.
Nobody sets the price of a share. It's decided by buyers and sellers, much like bidding at an auction: if lots of people want to buy a stock, its price goes up.5 If more people want to sell, sellers have to accept lower prices, and it goes down. That's why share prices move all the time, sometimes by a few cents, sometimes by several dollars.6
So what makes people want to buy or sell? Mostly expectations. A share's price reflects what investors expect the company to earn in the future.7 When news changes those expectations, the price changes. That has a surprising consequence: a great company isn't automatically a rising stock. If everyone already expects big profits, that's already in the price. Only new information moves it, and because nobody can predict tomorrow's news, economists say prices follow a "random walk with a trend": day to day, up and down are about equally likely, but over time the upward steps have tended to be bigger.7
When "the market is down," it means that on average, share prices across many companies fell. That happens when lots of investors, all at once, start expecting lower profits or more risk. The usual culprits are:512
Often it's a mix, and fear can feed on itself: in the 1987 crash, sell orders vastly outnumbered buyers, and prices tumbled.17 What about today? This page doesn't track live prices, and nobody can reliably predict the market's next move.57 For the reasons behind a particular day's fall, check a trusted news source.
A fall of 20% or more in a broad index over at least two months is called a bear market; a rise of 20% or more is a bull market.1920
With thousands of companies trading, people use an index to sum up "the market." An index tracks a basket of stocks that represents a market or a part of it.10
| Index | What it follows |
|---|---|
| Dow Jones Industrial Average | 30 large "blue chip" U.S. companies10 |
| S&P 500 | 500 of the largest U.S. companies9 |
| Wilshire 5000 | Most publicly traded U.S. stocks10 |
In the explainer, the index is a simple average of five made-up shops, so one shop can fall while the index still rises. Real indexes often give bigger companies more weight, based on market capitalization: share price times the number of shares.1123 You can't buy an index itself, but index funds try to copy one.11
Over long periods, stocks as a group have given high returns, but with big risks, especially in the short run.9 Here's the average yearly total return (price gains plus dividends) of S&P 500 stocks by decade:9
| Decade | 1950s | 1960s | 1970s | 1980s | 1990s | 2000s | 2010s |
|---|---|---|---|---|---|---|---|
| Avg. yearly return | 19.25% | 7.78% | 5.88% | 17.55% | 18.21% | −1.00% | 12.65% |
And there have been deep drops along the way:
Large-company stocks as a group have lost money in about one year out of every three, yet investors who stuck with stocks over long stretches, say 15 years, have generally been rewarded, with no guarantee.1 That's why many people practise diversification, spreading money across many different investments ("don't put all your eggs in one basket"), so one bad company or sector hurts less.18 Picking winners is hard: typically half to two-thirds of stock-picking funds fail to beat the market average.7
Want to see why long periods matter so much? Read how compound interest works. And to see why a dollar buys less over time, see what causes inflation.
Companies raise money by selling small slices of ownership called shares. After that first sale, investors buy and sell those shares with each other on stock exchanges such as the New York Stock Exchange and Nasdaq. A trade happens when a buyer's price (the bid) meets a seller's price (the ask). If more people want to buy than sell, the price rises; if more want to sell, it falls.
The market falls when many investors expect lower profits or more risk at the same time. Common reasons include rising interest rates, fears of a recession, weak company results, and big shocks such as wars, pandemics or natural disasters. Nobody can reliably predict these moves; for the reasons behind a particular day's fall, check a trusted news source.
Usually not. A company receives money only when it sells its own new shares, for example in its IPO, for example in its initial public offering (IPO). When you buy a share later on an exchange, your money goes to the investor who sold it, not to the company.
No single person. The price is simply the last price at which a buyer and a seller agreed to trade. It moves all day as buyers and sellers change what they're willing to pay, mostly based on what they expect the company to earn in the future.
An index tracks a basket of stocks to show how a part of the market is doing. The Dow Jones Industrial Average follows 30 large U.S. companies, and the S&P 500 follows 500 of the largest U.S. companies. You can't buy an index directly, but index funds try to copy one.
Yes. Share prices go down as well as up, and there's no guarantee a company will do well. Large-company stocks as a group have lost money in about one year out of every three, and if a company goes bankrupt its common shareholders are last in line and may get nothing.
Nobody knows. Past returns have varied a lot: S&P 500 stocks averaged about 18% a year in the 1990s but lost about 1% a year in the 2000s. Over long periods stocks have generally grown, but future returns are never guaranteed, which is why many people spread their money across many investments.