When people say they’re “investing in the stock market,” they’re not buying the market itself. Instead, they’re buying individual stocks listed on exchanges like the New York Stock Exchange or Nasdaq. These stocks represent partial ownership in companies. Exchanges help match buyers and sellers, track demand, and set stock prices.
Getting Started With a Brokerage Account
To trade stocks, most individuals use brokers—usually online platforms today. The broker places trades on your behalf through an exchange. The first step is opening a brokerage account, which takes about 15 minutes and works a lot like opening a bank account. The NYSE and Nasdaq operate from 9:30 a.m. to 4 p.m. Eastern Time, though some brokers allow premarket and after-hours trading.
You Don’t Need to Know Everything
If you’re investing for retirement through a 401(k) or IRA, you can do just fine without knowing the ins and outs of the market. But if you want to actively trade, it’s important to understand how the stock market works and how to evaluate trades.
What It Means When the Market Goes “Up”
When people say the market is up or down, they usually refer to major indexes like the S&P 500, the Nasdaq Composite, or the Dow Jones Industrial Average. Each index tracks a group of stocks and represents a slice of the market. Many investors use these indexes to benchmark their portfolio or invest in them through index funds and ETFs.
Investing vs. Trading
Most investors build a long-term, diversified portfolio and hold it through market ups and downs. But traders aim to profit from short-term changes in stock prices. Some are day traders who buy and sell throughout the day, while others trade more casually. Successful trading often involves detailed research, technical analysis, and tools like charts and analyst reports.
Bull and Bear Markets Explained
A bull market means prices are rising and investor confidence is high. A bear market means prices have dropped by around 20% or more, usually across multiple indexes. While bear markets can signal a slowing economy, bull markets tend to last longer. For example, the S&P 500 entered a bull market in October 2022 after a decline earlier that year and reached new highs in May 2024.
Crash or Correction?
A correction is a market drop of 10% or more. A crash is a much sharper and sudden decline, like the one seen in early 2020 during the COVID-19 outbreak. Although crashes can be alarming, markets often recover. Selling during a crash locks in losses, while staying invested often leads to gains over time.
Why Diversification Matters
Diversification means spreading your investments across multiple companies or sectors to reduce risk. Instead of putting all your money into one stock, many investors use index funds, mutual funds, or ETFs to hold a basket of stocks. This helps protect against individual company failures. A common strategy is to invest most of your portfolio in funds and a small portion in hand-picked stocks you believe in.
