How do stock markets work?

At its core, the stock market is really just a marketplace just like a farmers’ market, but instead of apples and oranges, companies are offering pieces of ownership called stocks or shares.

When you buy a share, you're buying a small slice of a company. If the company grows and becomes more valuable, so does your share. If it pays out profits to shareholders, you might receive dividends, which is like a reward for investing in that particular stock.

Stocks are listed on a stock exchange, such as the London Stock Exchange (LSE) or New York Stock Exchange (NYSE). These are highly regulated marketplaces that make sure trades are carried out fairly, transparently, and efficiently.

As a retail investor, you wouldn’t usually interact with these exchanges directly. Instead, you’d use an investment platform, like Aviva or other online brokers, to place your trades. These platforms act as intermediaries, allowing you to buy individual shares or invest in funds (which pool your money with other investors to buy a range of assets).

When you buy a share or a unit in a fund, whether it’s to buy shares in a company or units in a fund, the platform handles the transaction on your behalf, matching your order with a seller in the market.

These can be done within an investment account, such as a General Investment Account, a Self-Invested Pension or a Stocks and Shares ISA.

Although it is important to remember that you may need to pay tax on your investments depending on personal circumstances, and tax rules can change over time.

Imagine a popular UK coffee chain is listed on the stock market. Recently, they announced record profits and plans to expand across Europe. Investors see this as a sign of strong future growth, so more people want to buy shares in the company. As demand increases, the share price rises.

Now imagine a few months later, a news report reveals that coffee bean prices are soaring due to poor harvests. Investors worry this could hurt the chain’s profits. Some decide to sell their shares. If more people are selling than buying, the share price falls.

So what drives this demand and supply? A mix of factors, which can include:

• Company performance: Strong earnings, new products, or expansion plans can boost demand.
• Economic indicators: Interest rates, inflation, and employment figures can influence investor confidence.
• Market sentiment: News headlines, analyst opinions, and social media can sway public perception.
• Global events: Elections, pandemics, or geopolitical tensions can affect stock markets.

Investors are essential to the market. The money they invest helps companies grow, innovate, and hire. In return, you have the potential to earn returns through rising share prices and dividends.

There are two main types of investors:

• Active investors, who pick individual stocks or funds, and can try to "beat the market"
• Passive investors, who invest in broad market funds (like index funds) and aim to match market performance

Both approaches have their merits and downsides, and many investors use a mix of both.

All investing involves risk. Stock prices can (and often do) go down as well as up, and there are no guarantees so you could get back less than you invested. But risk isn’t necessarily something to fear when investing, rather it’s something to understand and manage according to your goals.

Generally, there are two mainstream ways to try manage risk when investing:

• Diversification: Where you spread your money across different companies, sectors, and regions to reduce the impact of any one investment performing poorly.
• Long-term investing: Staying invested over time could help to smooth out short-term market ups and downs.

At Aviva, we believe in empowering you to take control of your financial future. Whether you want to explore self-directed investing or prefer a guided approach, we offer tools, insights, and support to help you make confident decisions.

Learn about investing

And if you’d like a more personal approach on how to invest, you can talk to an independent financial adviser. They can give you advice based on your goals. The government’s MoneyHelper service can help you find an adviser and offers free, impartial guidance.