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How do Stock Markets Work?

Stock markets are essentially auction houses for shares. Companies list shares to raise money – this is called an Initial Public Offering (IPO), and investors can then buy and sell those shares with each other on an exchange. Prices change in real-time, depending on how many people want to buy or sell a stock. 

The major stock exchanges (like the NYSE or London Stock Exchange) have set opening hours and are highly regulated to try and ensure trading is fair and transparent.

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How do Stocks Work?

When you buy a stock, you’re buying a small piece of a company – a share in its ownership. If the company performs well and becomes more valuable, so do your shares – and you! 

You can also earn money through dividends, which are portions of the company’s profits paid out to shareholders. 

Of course, the value of stocks can go down too. If the business performs poorly or market conditions shift, your investment can lose value.

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Understanding the Stock Market

The stock market isn’t a singular place where all stocks are traded –  it’s made up of lots of exchanges, sectors, industries, and regions. Tech, healthcare, energy, retail all react differently depending on the economy, news and investor sentiment.

That’s why most investors don’t just pick one stock and hope for the best. Instead, they build a diversified portfolio to spread their risk (more on that in the next section). Learn about investment portfolio management.

Why does the Stock Market go up and down?

In short: confidence and expectation. When investors are optimistic about a company or the economy, they tend to buy, which pushes prices up. When uncertainty hits (interest rate hikes, political instability, global events, natural disasters), investors might panic and sell, which drives prices down.

These ups and downs are part of the deal when you’re investing. They’re known as market fluctuations or volatility.

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What is Market Volatility?

Volatility refers to how much – and how quickly – the price of an investment changes. High volatility means big up and down price swings. Low volatility means steadier, more predictable price movements.

Volatility is normal and often driven by short-term news, but it doesn’t always reflect the long-term value of a company. That’s why many investors focus on time in the market rather than trying to time it perfectly.

Global Stock Market Indices

Market indices track the performance of a specific group of companies, giving you a snapshot of how that part of the market is doing. Some of the most well-known include:

• FTSE 100 – Top 100 companies listed in the UK
  
  
• S&P 500 – 500 of the biggest companies in the US
  
  
• Nasdaq – Primarily tech companies in the US
  
  
• Nikkei 225 – Major companies listed in Japan
  
  

You can’t invest in an index directly, but you can invest in index funds or ETFs that aim to track them, which is a great way to get broad market exposure. What are asset classes?

How to Invest in the Stock Market?

You can access the stock market through an investment platform or app (like Chip), and typically you’ll invest via one of the following:

• Stocks & Shares ISA – for tax-efficient investing
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• General Investment Account (GIA) – flexible, no contribution limits

You can invest in popular stock market indices by investing in index funds that track their performance directly, such as the S&P 500, FTSE 100 and the Nasdaq.  

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Investment Portfolio Management

Once you’ve got to grips with the basics of the stock market, and the different asset classes available to invest in, you’ll want to figure out the type of investment portfolio management style to suit you. 

The next guide in our series takes you through the options in more detail. 

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When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than your original investment. Chip does not offer financial advice and this should not be considered as a personal recommendation. Diversifying means spreading your investments across different sectors, countries and asset classes.

Seccl Custody Limited is the ISA Manager for the Chip Stocks and Shares ISA. Fund management charges apply. ISA limits apply. Invest £20k per tax year. Chip does not provide tax advice or financial advice. Tax treatment depends on individual circumstances and may be subject to change in the future. GIA proceeds are potentially taxable, subject to any annual exemption that may apply.