A stock market is a place where investors can exchange shares of publicly held companies for cash. Private firms that need additional funds for expansion or to pay off debt may decide to float their shares in the market for others to buy. In some cases, the firm will conduct an initial public offering, using investment banks to sell shares to the general public. In other cases, private firms may allow their existing shareholders to sell shares in the market at any time.
Investors, as a group, determine stock prices through supply and demand. If many people want to purchase a stock, the price will rise, which in turn entices current shareholders to sell for a profit. The opposite is also true: If few investors want to purchase a stock, its price will fall.
Stock market prices can also be determined by fundamental and technical factors, such as a company’s profitability from its operations and its ability to sell goods or services to consumers. These factors are analyzed by professional traders and brokers, and their collective decision-making helps shape the demand for a given stock.
In modern times, the stock market has become central to the economy. While it has always been a critical tool for raising money, the influence of financialization has transformed the market from a platform for business financing to one where millions of Americans have their retirement and investment strategies invested. Whether you’re a long-time investor or simply watching your 401(k) grow, understanding how the stock market works can make your journey easier.