HOW STOCK MARKETS WORK
Plain English
Stock markets are just organized places where buyers and sellers meet to trade shares. The NYSE is like an auction house for stocks. Prices go up when more people want to buy than sell, and down when more want to sell than buy.
Going deeper
Stock markets facilitate the buying and selling of securities through regulated exchanges. When a company first offers shares to the public, it does so through an Initial Public Offering (IPO) on the primary market. After that, shares trade on the secondary market between investors. Modern markets are almost entirely electronic, with orders matched by computer algorithms in fractions of a second. Market makers provide liquidity by always offering to buy and sell. Prices are determined by supply and demand — the last price at which a trade occurred becomes the current market price.
Examples
Supply and Demand
Company ABC just reported record profits. Thousands of investors rush to buy shares. But current owners don't want to sell at the old price. Buyers must bid higher and higher to convince sellers to part with their shares. The price rises from $50 to $65 in a day.
The Bid-Ask Spread
Stock DEF shows Bid: $25.00, Ask: $25.05. Buyers are willing to pay up to $25.00. Sellers want at least $25.05. The $0.05 difference is the spread — the cost of instant execution. Highly traded stocks have tiny spreads; thinly traded stocks have wide ones.