The stock market can sound like something only professionals understand. Underneath the jargon, it is a marketplace, not so different from a car auction: people who own something, people who want it, and a system that matches them up. The difference is what is being traded. On the stock market, it is ownership of real businesses.

A company that wants to be owned by many people splits its ownership into equal pieces, called shares. Own one share and you own a tiny slice of everything the business has and everything it earns.

A Company, Cut Into Slices
Imagine a company split into 100 shares. Owning one gives you 1% of the business.
Your shareOwned by other investors
Real companies are split into millions or even billions of shares, so one investor's slice is usually far smaller than this. Owning shares normally brings a right to vote at shareholder meetings and a right to a portion of any profits the company chooses to pay out.

Shares first come into existence when a company sells part of itself to raise money, often through an initial public offering, or IPO, when it first lists on a stock exchange. After that, those same shares are bought and sold between investors, day after day, for years. That distinction matters, because it changes where your money actually goes.

Where Your Money Actually Goes
Two very different purchases with the same name.
Buying at the IPO
When a company first sells its shares
Investor→Company
The company receives the cash directly, and can use it to hire, build or expand.
Buying afterwards
Almost all stock market activity, every day
Investor→Previous owner
The company receives nothing. Ownership simply changes hands between two investors.
Day-to-day price moves do not put money into a company or take it out. The share price still matters to the company, though: a higher price makes it cheaper to raise money later, lets it use its own shares to buy other businesses, and affects what shares given to its staff are worth.

A stock exchange, such as the London Stock Exchange or the New York Stock Exchange, is the marketplace where that trading happens. Ordinary investors do not deal with the exchange directly. They use an investment platform or broker, often through an account such as a Stocks and Shares ISA, which passes their order on.

The Journey of a Single Order
What happens between pressing “buy” and the share appearing in your account.
1

You

Place an order to buy in your investment app or account.

→
2

Platform or broker

Passes the order on to the market for you.

→
3

Exchange

Matches your order with an investor who wants to sell.

→
4

Your account

The share is now yours, usually held by the platform on your behalf.

For large, popular companies this takes a fraction of a second. Settlement, the formal transfer of ownership and cash behind the scenes, follows shortly afterwards.

So where does the price come from? Nobody decides it. At any moment, some investors are offering to buy at a certain price and others are offering to sell at a certain price. The exchange keeps a running list of these offers, called the order book.

Inside the Order Book
A simplified snapshot of the offers waiting on one company's shares.
£10.02What you pay to buy right now
4pThe gap, called the spread
£9.98What you get to sell right now
Buy immediately and you pay the lowest price a seller is asking. Sell immediately and you receive the highest price a buyer is offering. The small gap between the two, the spread, is one of the hidden costs of trading. Prices and quantities here are invented for illustration.

The price you see quoted for a share is simply where the most recent trade happened. It is a record of what one buyer and one seller agreed a moment ago, not a verdict on what the business is worth.

Prices move when the balance between buyers and sellers shifts. If more people want to buy than sell at today's prices, buyers have to accept higher asking prices to get their shares, and the price climbs. If more people want to sell, the opposite happens.

How a Price Climbs
Using the order book above, one keen buyer arrives.
Before

The cheapest seller is asking £10.02, for 400 shares.

£10.00
Last trade price
→
A buyer wants 1,000 shares now

They take all 400 shares at £10.02, then still need 600 more, so they take them from the next seller at £10.03.

→
After

The £10.02 seller is gone. The cheapest seller left is asking £10.03.

£10.03
Last trade price
Nothing about the business changed. One investor wanted shares more urgently than the cheapest seller had to offer, and the price moved up to meet them. Selling works the same way in reverse.

What shifts that balance? Anything that changes what investors expect from the business, or how they feel about it: company results, news, interest rates, or simply mood. Some of those reasons reflect a real change in the business. Many do not, which is why a share price can move all day while the company itself is exactly the same as it was that morning.

Behind every stock is a company. Find out what it's doing.Peter Lynch

For the investor, owning shares can pay off in two ways.

Two Ways Shareholders Can Be Rewarded
Neither is guaranteed.
Dividends
A share of the profits, paid in cash
Some companies pay part of their profits to shareholders, often twice a year or every quarter. Others keep everything to reinvest in growth. Dividends can be cut or stopped at any time.
Growth
A rise in what the share is worth
If a business becomes more valuable over time, other investors are usually willing to pay more for a slice of it. Prices can also fall, sometimes well below what you paid.
Over long periods, rising profits are what tend to drive both. In the short run, the price can move in either direction for reasons unrelated to how the business is performing.

One last term worth knowing. When the news says “the market” rose or fell today, it usually means an index, such as the FTSE 100 (the 100 largest companies listed in London) or the S&P 500 (500 large US companies). An index tracks the combined value of a group of shares, like a scoreboard for that part of the market. Index funds let investors own a small slice of every company in an index in a single purchase.

01

A share is part-ownership of a real business.

Over time, what it is worth depends on what that business earns.

02

After the IPO, most trading happens between investors, not with the company.

Daily price moves change what a stake could be sold for. They do not change the cash the company holds.

03

A share price is the last agreed trade, not a valuation.

It comes from the balance of buyers and sellers in the order book, and no one sets it directly.

04

Prices move whenever that balance shifts.

Sometimes the cause is a real change in the business. Often it is not.

In short: the stock market is a marketplace for slices of real businesses.

Companies sell shares to raise money, then investors trade those shares among themselves on exchanges, through platforms and brokers. The price on your screen is just the last deal struck between a buyer and a seller, and it moves whenever the balance between them shifts.

So next time a share price jumps or drops, you can ask: has something changed in the business itself, or has the balance of buyers and sellers simply shifted for the day? The answer won't tell you whether to buy or sell. It will tell you what kind of move you are looking at.