Back to basics: what is the stock market?

If you’re not well-versed in the basics of the stock market, what you hear on the news market wrap-up might sound more like Klingon than English, and that’s okay. 

So, so many acronyms. 

Understanding the stock market

A share of stock (psst, read our explainer on shares), is a share in the ownership of a company, as the name so rightfully suggests. Stocks are bought and sold on stock markets, a hub of buyers and sellers of publicly traded company shares. 

Stocks are listed on a specific exchange, where buyers name their highest price—the bid—and sellers name their lowest price, called the “ask”. Unlike an actual marketplace where you might show up and buy fruit, individual traders are usually represented by stockbrokers (most of them online). Trades can be placed by a stockbroker either on the behalf of a portfolio manager or an individual investor (that’s you!).

Stocks move up and down based on a number of fundamentals about a company: like its earnings, changes in leadership and anything in the news surrounding the brand. A market index tracks the performance of a group of stocks. 

Example: The ASX 200 and the All Ordinaries (or, “All Ords”) are Australian market indexes.

The bottom line

The stock market allows buyers and sellers to come together and trade under specific rules. 

Ready to give the stock market a go? Sign up to OpenTrader and get two free months of Premium, on the house. 

Okay, but I’d like to know…

How are prices determined on a stock market?

How does a market index track the performance of a group of stocks?

Who participates in the stock market?

We’re lucky to have a trusty team of trading experts on hand to answer your burning questions. Here’s what Kieran Neeson, our wise trading guru, has to say. 

How are prices determined on a stock market?

“Prices for individual stocks and indexes are based on perceived value, and supply and demand. The more buyers there are, the higher the underlying stock/index price goes and conversely, the more sellers there are, the lower the underlying will go.

The reasons why there would be more buyers than sellers varies from being stock specific to more macro influenced. If for example several stock report earnings on any given day and they all beat expectations, their share prices will likely rise which will also push up the price of the index they are part of.”

How does a market index track the performance of a group of stocks?

“Market indexes are ways to track the performance of assets in a standardised way. The NASDAQ for example in the U.S is an index that is made up of stocks in the tech sector so is an accurate representation of how that sector is performing.

Each stock that’s listed on the NASDAQ will contribute to the index depending on the company’s size and therefore weighting so when larger companies such as Google or Amazon perform well, this typically lifts the NASDAQ and pushes it higher.”

“Who participates in the stock market?

“There are many different participants when it comes to the stock market that all work in conjunction with each other to make the system work and function properly. This includes investors, companies providing technology that allow investors to access the market (brokers), and also settlement businesses that facilitate the change of beneficial ownership when shares are bought and sold.

There are also regulators that protect the integrity of the market and ensure all these participants are conducting themselves inline with policies and regulations.” 

If you’re feeling ready to give trading a red hot crack, sign up to OpenTrader and get two free months of Premium. We’d be delighted to have you.