How does the stock market work?

What is the stock market?

The stock market is a blanket term that refers to the general trading of company shares. It’s the marketplace in which people buy and sell shares.

Investors will typically trade company shares on a stock exchange, which is an institution that connects buyers and sellers of stocks.

There are numerous stock exchanges around the world, with notable examples being the London Stock Exchange (LSE), New York Stock Exchange (NYSE) and National Association of Securities Dealers Automated Quotations (NASDAQ) 🤓

You may hear references to index funds or stock market indexes (see more on this in our section about stocks versus funds below).

Stock indexes are a way to group specific investments that have been selected to track the performance of a particular stock exchange overall, e.g. the S&P 500 in the US and the FTSE 100 in the UK.

What are primary and secondary markets?

As we’ve already covered, the phrase ‘stock market’ is a blanket term that covers all investing in stock exchanges around the world.

The market also denotes trading across both the primary market and the secondary markets:

The primary market is where securities are created. Here, companies sell new stocks and bonds to the public for the first time, such as with an initial public offering (IPO).

The secondary market is where those securities are traded by investors. This will include the specific stock exchanges such as the New York Stock Exchange and the Nasdaq etc.

Why do people invest in the stock market?

Investing is the process of using a resource (usually money) to try and generate additional income. Aka more money.

This can allow people to offset the effects of inflation (which can gradually erode the real spending power of money), and potentially grow their money for the future to make more of what they have.

A common way for people to do this is by backing public companies listed on a particular stock exchange. They do this in the hope that the company’s stock price will increase, in which case they may be paid dividends or they can resell their shares at a higher price to earn a return on their investment 📈

Unlike a savings account, where you can earn a modest interest rate while your money remains protected (money in a bank account is covered by the Financial Services Compensation Scheme), any money you invest is at risk. You could lose money if the value of your investments goes down.

What’s the difference between trading and investing?

Broadly speaking, there is no difference between trading and investing. A trade is simply the act of buying or selling an investment.

However, day trading is a term reserved specifically for rapidly buying or selling investments in an attempt to ‘beat the market’. This is a short-term strategy. The word investing might be more commonly used to reflect a long-term strategy, which plays out over your entire lifetime 🌱

What’s the difference between stock and a fund?

Stocks/Shares

A share is a fraction of a business. The words ‘stocks’ and ‘shares’ are sometimes mixed up, but a share is an individual unit of company stock.

When a company sells shares it issues stock, by selling a fixed number of shares, on the stock market. ‘Fractional shares’ are portions of one share.

Investment Funds

Funds are managed by professionals in order to maximise returns while achieving a specific aim. A fund’s portfolio will often contain stock from many different individual companies.

A fund’s aim could be to focus on a certain asset class, such as Technology or Environmental (ESG). Alternatively, a fund might attempt to mirror a particular stock market index, like the S&P 500 or FTSE 100.

Funds allow everyday investors to pool their money and take advantage of efficiencies from operating as a group. This means that funds can be heavily diversified (which means they contain lots of individual assets, in the hope that any losses only affect a small portion of the portfolio).

Why does a company’s share price fluctuate?

The share prices listed on the stock market will fluctuate and naturally be set through an auction process and the laws of supply and demand.

In every stock transaction, there must be a buyer and seller who both find the price acceptable for a trade to be made. If buyers for a particular stock create a level of demand that outweighs supply, then sellers can set a higher price until equilibrium is restored.

And of course, the opposite is also true when supply outweighs demand and the price decreases.

How to invest in stock

If you’re wondering how to buy stock for yourself, there are a few things you might want to consider before stock market trading.

Tech advances mean that stock exchanges will now use digital systems to match buyers and sellers. Investors can access these through a broker, who provides a platform or interface through which trades are placed.

To trade a company's shares, the business must be listed on the stock exchange. Typically this is done through an Initial Public Offering (IPO), when a private company sells a block of shares to the public for the first time, and ‘goes public’.

A popular option is a stock market app, which allows you to track the performance of your investments from your phone 📲 An app like Plum was designed to make the stock market accessible for beginners, by simplifying the range of choices and providing an easy-to-use platform to manage investments.

Which is the best investing style for me?

Like many things in finance, investing is personal. Your strategy should be guided by your risk aversion and the time and money you wish to commit.

To be a trader?

It is possible to react faster than other traders in the market, by predicting high-growth investments or perfectly timing the sale of your trades. And this can be very profitable… but in reality, attempting such a strategy is extremely risky 🎢

To be a successful trader you need to dedicate a lot of time to pursuing the knowledge it requires. Otherwise, you’re effectively gambling with your future. And most of us don’t need that kind of pressure!

Or, do funds have more fun?

If you’re happy to take a more passive approach, and you don’t mind sacrificing the best possible yields in favour of returns that are potentially more stable, you could invest in funds.

Using your money to buy a share of an index fund might make the most sense for your investments if you just want to set-and-forget them.

Plus, you can save on trading fees with this strategy, because a market index fund should reduce the need to be continually buying/selling investments 🥵

What does Capital at Risk mean?

Historically, when it came to investing money, there was little incentive for anyone facilitating the process to create a user-friendly experience. Stockbrokers and wealth managers relied on regular people being dependent on them to invest their money.

All that changed when the rise of digital platforms and the introduction of Open Banking paved the way for investing apps. Apps like Plum have put the power to invest (quite literally) in the palm of your hand.

And whilst making investments more accessible for everyone is obviously great in terms of financial inclusion, it’s especially important that any new investors are also made aware of the potential risks.

However, some of the old, confusing terminologies remain. Here, the word ‘capital’ is just another word for money.

So, this is a fancy way of saying that your money is at risk because the value of your investments can go down as well as up.

When does the stock market open?

If you’re keen to start trading then you’ll probably be wondering what time the stock market opens ⏰

The UK (London) Stock Exchange opens from 8 am UK time and closes at 4:30 pm, with a break from 12:00 pm to 12:02 pm.

Trading hours for the US stock market, including the NYSE and the NASDAQ, are from 9:30 am Eastern time to 4 pm.

If you're using Plum to invest, any order placed outside of these times will be queued and executed as soon as the markets open again.

You can check our website if you’d like to learn more about the benefits of investing with an app like Plum.

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