Stock Market

Background

"The stock market" can be loosely defined as a set of exchanges and other places where shares of public companies are bought and sold. But to understand that definition, it’s important to define a few other terms, too. 

The stock market is made up of multiple “stock exchanges”—such as the Nasdaq and the New York Stock Exchange, two of the most well-known exchanges in the US (learn more about them). The sentence “I own 10 shares of Apple stock” illustrates the difference between “stocks” and “shares” (explore these definitions further).

History

In the early 1600s, the Dutch East India Company’s actions helped spur the creation of the first-ever stock exchange, the Amsterdam Stock Exchange. To raise funding for its ocean voyages, the Dutch East India Company decided to sell shares in the company and pay dividends—a portion of a company’s profits—to investors. Any citizen of the Dutch Republic could buy shares in the company, which were then bought and sold in open-air markets. 

One of those markets became the Amsterdam Stock Exchange, which officially opened for trading in 1611. For many years, the Dutch East India Company was the only company with any trading activity on the exchange (learn about the first stock exchange here).

It took almost another two centuries for one of today’s most well-known US stock exchanges to be created. In 1792, 24 stockbrokers and merchants stood under a buttonwood tree on New York City’s Wall Street and made the “Buttonwood Tree Agreement” that created The New York Stock Exchange (scroll through a stock market timeline).

How It Works

It’s easier to understand how the stock market works when you picture one company’s journey through it (see this video for an in-depth explainer). Let’s say you own a pet food company that you want to take public, giving people and other companies the ability to invest in it and own shares of your company’s stock. The added funds from those investments could help you create new products, such as dog and cat toys, hire more employees, or otherwise grow the company (here’s why companies go public). 

First, you would advertise the company to top investors, getting them excited to buy shares in it early. If those investors think your pet food company has potential, they can sponsor its initial public offering. An IPO is essentially a company’s debut on the stock market, and they happen frequently—many companies have had IPOs in 2024, including the social media platform Reddit (to date, these are the largest IPOs).

After your pet food company IPOs, any company or individual can purchase shares in it (find out more about IPOs). The price of the shares fluctuate with the company’s value—so they could become cheaper or more expensive depending on how much investors think the company is worth.  

Future

The world’s most educated investors spend their entire careers trying to predict what the stock market will do next, and even they can’t predict it with 100% accuracy. 

The Standard & Poor’s 500 (or S&P 500) is an index that tracks how 500 large companies listed on US stock exchanges perform over time (more on its history). Since 1957, the S&P 500’s average annual rate of return has been approximately 10.5%, or 6.6% after adjusting for inflation.