How The U.S. Stock Market Provides Opportunities for Investors and Traders To Make Money

When companies want to raise capital for operations, they may issue shares of stock in their company. Doing so allows investors and traders to buy these shares, which are traded in the stock market. Used interchangeably with the term “stock exchange,” two major exchanges lead the stock market in the United States: the NASDAQ and the New York Stock Exchange. Buyers and sellers use these two venues to purchase or sell shares of public companies.

Understanding How the Stock Market Works

The stock market is beneficial for investors and the companies that have shares trading. It allows each company to raise capital and use it to expand product lines, marketing or general operations. Investors benefit by having a way to grow their money, which is done by purchasing a stock and selling it at a higher price. According to the SEC’s investor education resources, understanding basic market mechanics is essential before committing any funds.

When an investor wants to purchase shares of a company in the stock market, they place a bid at a specific price. If another investor currently owns shares and wants to sell, they offer their shares at an asking price. The difference between the bid and ask is the spread. It can change quickly throughout the trading day, based on the number of buyers and sellers interested in trading their shares in a specific company. In its simplest form, the stock market acts as an auction place, matching prices with interested buyers and sellers.

How To Make Money in the Stock Market

If a person has saved money and wants to invest in a public company, such as Apple, Starbucks or Microsoft, they can purchase shares at the stock exchange where the shares are trading. After taking this action, they hope the stock’s value goes higher. If the price appreciates, they may decide to take profits, which are known as capital gains. The IRS defines capital gains as the profit realized from selling a capital asset, such as a stock, for more than its purchase price.

Getting Paid With Dividends

Money can also be made in the stock market by purchasing shares of a company offering dividends. These are payments given to shareholders who want a guaranteed income for holding shares. These investors typically plan on keeping shares for the long term and may buy more shares in the stock market if the value of the shares drops in price. Doing so would increase the dividend payment they receive and even the price entered, known as dollar cost averaging.

Dividends can be taken as a cash payment or reinvested, which gives an investor more shares and the ability to earn more in dividends during the following disbursement periods, which usually occur quarterly. Several investors make money in the stock market by investing in companies that pay dividends. The Federal Reserve’s Flow of Funds data shows that dividend-paying equities remain a cornerstone of long-term household wealth accumulation in the United States.

How Do People Purchase Shares?

To purchase shares in the stock market, a person can open an account at a broker offering the service. Online brokers such as Fidelity, Charles Schwab and platforms offered through financial institutions like Chase make opening a brokerage account relatively straightforward. Funds are sent to the person’s account to buy or sell shares. The account value will increase or decrease based on the movement of the shares owned. Shares can also be acquired by purchasing a mutual fund.

Going this route lessens the risk of holding shares in a single company as the mutual fund will typically purchase shares from multiple companies and offer shares in their mutual fund at one price. Using a mutual fund is a fantastic way for beginners to get started in the stock market as it can lessen risk via diversification. Robo-advisors offered by platforms such as SoFi and Betterment also provide automated, diversified portfolio management for new investors at low cost.

Regulations

To ensure the stock market is a safe place to purchase shares, it’s regulated. In the United States, the Securities and Exchange Commission (SEC) oversees the stock market. Its job is to protect investors, maintain fair, orderly, efficient markets and facilitate capital formation. Companies listed on the stock market are monitored by the SEC. Each company must meet specific requirements, such as filing quarterly financial reports, to be listed at an exchange. Failure to follow regulations can result in suspension and other disciplinary actions. In addition to the SEC, the Financial Industry Regulatory Authority (FINRA) plays a key role in regulating brokerage firms and their registered representatives to protect investors.

How To Choose a Stock Market Investment

When a person wants to get involved with the stock market, they can do so as an investor or trader. An investor looks primarily at a company’s fundamentals to ensure they are strong. Fundamental analysis typically involves reviewing metrics such as price-to-earnings (P/E) ratio, earnings per share (EPS) and debt-to-income ratios. If a company has good fundamentals, its shares may have a higher chance to increase in value over the long term, allowing the investor’s money to grow. Resources such as Morningstar’s stock research platform provide fundamental data and analyst ratings to help investors evaluate companies.

Investors and Traders

Traders also use the stock market to make money. However, they differ from investors when choosing the stocks of the companies they buy and sell. Typically, traders will look at technical charts to determine where the stock price is going in the short term based on indicators, such as moving averages. After buying shares, they may hold them for short periods, ranging from minutes to days, until their price objective is met. It is worth noting that FINRA’s Pattern Day Trader (PDT) rule requires traders who execute four or more day trades within five business days in a margin account to maintain a minimum of $25,000 in their account at all times.

Stock Market Cycles

The terms “bull” and “bear” are often used when referring to the stock market. In a bull market, prices rise, and the economy is usually doing well. Bear markets indicate a downturn in stock prices and sluggish economies. According to Investopedia, a bear market is formally defined as a decline of 20 percent or more from recent highs. Investing during a bear market can be dangerous as share prices for several companies can continue to drop. Strong demand for shares exists during a bull market, creating higher prices. In contrast, investors begin to sell their shares during a bear market to stop their funds’ value from dropping.

Stock Market Crash

A stock market crash can occur fast if many stocks lose value simultaneously. Two major stock market crashes occurred in the 1900s, resulting in a significant drop in the value of people’s portfolios. The first was in 1929, and the second in 1987. In the 1929 stock market crash, the Dow Jones Industrial Average lost 23 percent in two days. In the 1987 crash, the Dow Jones Industrial Average fell 22.6 percent in a single day — an event still referred to as “Black Monday.” More recently, the COVID-19 pandemic triggered a sharp market selloff in early 2020, with the S&P 500 dropping approximately 34 percent in just over a month before recovering, according to S&P Global.

Research Before Entering the Stock Market

When an individual is pursuing investing or trading in the stock market, conducting a fair amount of research is imperative. Doing so can help ensure that the value of shares increases after being purchased. If shares are bought in a fundamentally sound company, it should eventually be reflected in the stock price by creating higher prices. Tools such as the SEC’s EDGAR database give investors free access to company filings, 10-K annual reports and earnings disclosures to support informed decision-making. Additionally, the SEC’s Investor.gov portal provides free educational resources tailored to beginner and intermediate investors.

Frequently Asked Questions

What is the stock market and how does it work?

The stock market is a marketplace where buyers and sellers trade shares of publicly listed companies. It operates through exchanges like the NYSE and NASDAQ, which match buyers’ bid prices with sellers’ asking prices in real time. Companies list their shares to raise capital, and investors purchase those shares hoping they will increase in value over time.

How do beginners start investing in the stock market?

Beginners can start by opening a brokerage account with a firm such as Fidelity, Charles Schwab or through a bank like Chase. Many platforms offer fractional shares, allowing investors to buy partial shares of companies like Apple or Microsoft with as little as $1. Mutual funds and index ETFs are widely recommended starting points because they offer built-in diversification and lower individual risk.

What is the difference between a bull market and a bear market?

A bull market is a period when stock prices are rising and economic conditions are generally favorable. A bear market is defined as a decline of 20 percent or more from recent market highs, often accompanied by economic slowdowns. Investors typically increase their equity exposure during bull markets and may shift toward defensive assets during bear markets.

What are dividends and how do they work?

Dividends are cash payments made by a company to its shareholders, typically distributed on a quarterly basis. They are funded from the company’s profits and represent a way for investors to earn income without selling their shares. Investors can choose to receive dividends as cash or reinvest them to purchase additional shares through a dividend reinvestment plan (DRIP).

What is dollar cost averaging?

Dollar cost averaging (DCA) is an investment strategy where an investor purchases a fixed dollar amount of a stock or fund at regular intervals, regardless of the share price. This approach reduces the impact of market volatility by averaging out the purchase price over time. It is particularly effective for long-term investors who continue buying during market downturns.

Who regulates the U.S. stock market?

The U.S. stock market is primarily regulated by the Securities and Exchange Commission (SEC), which enforces federal securities laws, requires public companies to file quarterly and annual financial reports and investigates market fraud. FINRA (Financial Industry Regulatory Authority) also plays a regulatory role by overseeing brokerage firms and licensed investment professionals.

What is the difference between an investor and a trader?

An investor typically holds shares for months or years, focusing on a company’s long-term fundamentals such as earnings growth, revenue and competitive position. A trader buys and sells shares over shorter timeframes — sometimes minutes or days — using technical chart analysis and indicators like moving averages to identify short-term price movements. Each approach carries different risk profiles and tax implications.

What is the bid-ask spread in the stock market?

The bid-ask spread is the difference between the highest price a buyer is willing to pay (the bid) and the lowest price a seller will accept (the ask). A narrow spread typically indicates a highly liquid stock with many active buyers and sellers, while a wider spread may indicate lower liquidity. The spread represents a cost of trading and is a key consideration for active traders.

How do stock market crashes happen?

Stock market crashes occur when a large number of stocks lose significant value in a very short period, often triggered by economic shocks, panic selling or systemic financial failures. Notable examples include the 1929 crash (Dow fell 23% in two days) and Black Monday in 1987 (Dow fell 22.6% in a single day). Modern circuit breakers implemented by the NYSE help pause trading if the S&P 500 falls 7%, 13% or 20% in a single day to prevent runaway panic selling.

What is a mutual fund and how does it reduce risk?

A mutual fund pools money from many investors to purchase a diversified portfolio of stocks, bonds or other securities. Because the fund holds shares across multiple companies and sectors, a decline in one stock has a smaller overall impact on the fund’s value. This diversification reduces the risk associated with investing in any single company and is one reason mutual funds are frequently recommended for beginning investors.