What is the stock market and how does it work?

Last Update Friday 14 August 2026 04:16

What is the stock market?

The stock market, also called the share market or equity market, is a collection of exchanges and markets where shares in publicly listed companies are bought and sold. When a company lists on a stock exchange through an IPO, it sells shares to the public in exchange for capital. Those shares then trade between investors on the secondary market, with prices changing continuously in response to supply and demand.

The UK's primary stock market is the London Stock Exchange (LSE), home to the FTSE 100 index of the 100 largest listed companies. The FTSE 100 reached a historic five-figure close for the first time in January 2026, touching 10,004.57, and has since set a fresh all-time intraday high of 10,990.8 on 31 July 2026. Globally, the US market dominates, led by the New York Stock Exchange and the NASDAQ, home to the S&P 500 and the technology-heavy Nasdaq 100.

How does the stock market work?

Stock markets operate through exchanges that match buyers with sellers. When you place a buy order for shares in a company, the exchange matches it with someone willing to sell at that price. The price moves continuously throughout the trading day as the balance of buyers and sellers shifts. Prices are driven by company earnings, macroeconomic data, investor sentiment, interest rates and global events.

UK shares settle on a T+2 basis: ownership formally transfers two business days after the trade. During market hours, prices fluctuate in real time on the exchange. Outside market hours, over-the-counter (OTC) trading continues at wider spreads. Most UK retail investors access the stock market through a share dealing account or stocks and shares ISA, which provides tax-efficient access to shares, ETFs and investment trusts.

What are the main stock markets?

What can you buy on the stock market?

The term 'stock market' covers several types of listed security:

• Ordinary shares: the standard form of equity ownership. Shareholders receive dividends if declared and can vote at annual general meetings.

• ETFs: exchange-traded funds holding a basket of securities. A single ETF purchase can provide exposure to an entire index or sector. Many UK retail investors build their core portfolio using UK ETFs tracking the FTSE 100 or global indices.

• Investment trusts: closed-ended listed funds that can hold shares, property, infrastructure and other assets. They are listed on exchanges like ordinary shares.

• Preference shares: a hybrid instrument offering a fixed dividend with priority over ordinary shareholders in a wind-up, but typically no voting rights.

• REITs: real estate investment trusts listed on stock exchanges, providing equity-like access to property portfolios.

How to invest in the stock market

For most UK investors, the starting point is a beginner's guide to investing. The core decisions are which account to use, which assets to hold and how long to remain invested.

1. Choose your account type

A stocks and shares ISA is the most tax-efficient route for most investors: all gains and income are permanently sheltered from UK capital gains tax and income tax within the £20,000 annual allowance. A share dealing account suits amounts above that limit or assets not ISA-eligible. A SIPP provides pension-focused investment with upfront tax relief of up to 45% on contributions. Understanding tax-efficient investing helps ensure you are using the right wrapper for your situation.

2. Decide on your approach

Passive investing through low-cost index ETFs is the evidence-backed approach for most long-term investors. Active stock picking suits those with the time and expertise to research individual companies. Most investors use a combination: a core of passive index ETFs plus a smaller allocation to individual stocks or thematic funds.

3. Consider diversification

Diversification reduces the impact of any single company or sector underperforming. A single FTSE 100 ETF provides exposure to 100 companies across multiple sectors. Adding global exposure through an MSCI World tracker diversifies further. Niche strategies, including penny stocks, carry much higher risk due to lower liquidity and greater volatility, and require a specific risk appetite and understanding.

4. Think long term

The stock market is volatile in the short term but has historically delivered strong returns for investors who stay invested through market cycles. Missing the 10 best trading days in any given decade significantly reduces long-term returns. Time in the market consistently outperforms attempts to time the market for most investors.

Stock market FAQs