The stock market, explained
What shares and indices actually are — the S&P 500, Dow and Nasdaq in plain English.
A share of stock is a small piece of ownership in a company. When you buy a share, you own a tiny slice of that business and can benefit if it grows — either because the share price rises or because the company pays out part of its profits as a dividend. Shares are bought and sold on stock exchanges, and their prices move constantly as buyers and sellers disagree about what a company is worth.
What is an index?
Following thousands of individual shares is impractical, so investors watch indices — baskets of stocks that summarise how a whole market is doing. The S&P 500 tracks 500 of the largest US companies and is the most widely used gauge of the American stock market. The Dow Jones Industrial Average follows 30 big-name companies, while the Nasdaq is weighted toward technology firms. When the news says 'the market rose today', it usually means one of these indices went up.
Why prices go up and down
In the short term, prices reflect the constant tug-of-war between buyers (bulls) and sellers (bears) reacting to news, earnings and emotion. Over the long term, a company's share price tends to follow how much profit it actually makes. This is why a single day's move rarely matters much, while the trend over months and years matters a great deal.
Nothing on this site is financial advice. Investing carries risk, including the loss of money you put in. See our guide to what moves markets and our glossary for more.