What is the stock market?

As the name suggests, the stock market is a marketplace for the trading of stocks or shares. There are many stock markets around the world, and the UK’s main exchange is The London Stock Exchange (LSE).

To form a market index, company shares are grouped together, and their value is combined as a weighted average (the bigger the company the larger its effect on the value of the index) resulting in a figure. Generally, companies of similar size and value are grouped together. Often you hear the market being up or down. This relates to stock market indices rising and falling.

“If a company you hold shares in pays dividends, you’ll receive dividend payments. If a company is successful and manages to grow profits over time, the amount it pays out as a dividend can increase.”

Stocks are bought and sold constantly throughout each trading day, and their prices change all the time. When the price of a stock increases enough to recoup any trading fees, you can sell your shares at a profit. These profits are known as capital gains. In contrast, if you sell your stock for a lower price than you paid to buy it, you'll incur a capital loss.

In either case, your fate as an investor depends on the fortunes of the company. A company generally needs strong earnings to pay a dividend, and there needs to be investor demand for you to see capital gains.