The stock market is the network of exchanges where shares, small pieces of ownership in companies, are bought and sold. A company raises money once, when it first sells shares to investors in an initial public offering (IPO). After that, investors trade the shares with each other on an exchange such as the NYSE, Nasdaq, the London Stock Exchange or India's NSE, through brokers. The price at any moment is simply the last price at which a buyer and a seller agreed, set by matching their orders. Prices move because people's expectations of a company's future profits, and of interest rates, keep changing. Shareholders earn through dividends and by selling for more than they paid.

This is an educational explanation of how the market works, not investment advice. Every company and number below is invented.

One company from start to finish

Definitions only make sense with something to follow. Meet Crumb and Co, an invented chain of 40 bakeries.

Private. The two founders own all of it. They have one million shares between them; a share is just a unit of ownership, so each share is one millionth of the company.

Going public. Crumb and Co wants 30 million to open 60 more shops. Instead of borrowing it, the company creates 600,000 new shares and sells them to investors at 50 each in an IPO, with an investment bank organising the sale. The company receives 30 million (less the bank's fees). The founders now own one million of 1.6 million shares, 62.5 per cent.

Trading. The next morning, the shares are listed on an exchange. An investor who bought at 50 can sell to someone else. If she sells at 54, she gets 54 from the buyer. Crumb and Co gets nothing. This is the part most people miss.

Almost everything people mean by "the stock market", the prices on the news, the charts, the crashes, is the secondary market. It matters to the company anyway, because a liquid market is what persuaded investors to buy at the IPO, and because the share price affects how cheaply the company can raise money later.

How a price is actually set

An exchange keeps an order book for each company: a list of everyone who wants to buy and at what price (bids), and everyone who wants to sell and at what price (asks or offers).

Here is a moment in Crumb and Co's order book:

The highest bid is 53.90; the lowest ask is 54.00. The 0.10 gap is the spread. No trade happens while nobody will cross it.

Now someone sends a market order to buy 500 shares, meaning "buy now at the best available price". The exchange's matching engine gives them the 300 at 54.00 and 200 at 54.10. The last traded price is now 54.10. That is the share price you would see quoted. Nobody decided it; it is where the last buyer and seller met.

A limit order sets a price: "buy 1,000 at no more than 53.80". It joins the book and waits. Most of the book is limit orders. Large banks and trading firms called market makers keep both bids and asks in the book all day, which keeps the spread narrow and means there is nearly always someone to trade with.

If more people want to buy than sell at current prices, buy orders eat through the asks and the price climbs. If sellers outnumber buyers, it falls. That is supply and demand, done one order at a time.

Who is involved

• The company issues shares and must publish accounts regularly once it is listed.
• Investors: individuals, and much larger institutions such as pension funds, insurers and index funds.
• Brokers take your order and send it to the market. Most individuals now use an app, which is a broker.
• Exchanges run the order books and matching engines: NYSE and Nasdaq in the US, the London Stock Exchange, NSE and BSE in India, Tokyo, Shanghai and others.
• Clearing houses stand between buyer and seller so each side gets what it was promised even if the other fails.
• Regulators set and enforce the rules: the SEC in the US, the FCA in the UK, SEBI in India.

Settlement: when the share actually changes hands

A trade agreed in a millisecond is not finished. The money and the shares move afterwards, a step called settlement. The US, Canada and Mexico moved to settling one business day after the trade (T+1) in May 2024, and India completed its move to T+1 in 2023. The UK and the EU have set 11 October 2027 for their move from two days to one.

Why prices move

A share is a claim on a company's future profits, so its price is the market's current guess at what those profits are worth today. Anything that changes the guess moves the price.

The price can also run far ahead of or behind any sensible value for long periods. Crowds overreact both ways. Markets as a whole have risen over long periods historically, but individual companies fail, and an index can fall a long way and take years to recover. A fall of 20 per cent from a recent high is conventionally called a bear market.

How shareholders earn

Two ways. Dividends: if Crumb and Co pays out 1.50 a share from its profits each year, a shareholder with 100 shares receives 150. Many growing companies pay none and reinvest instead. Capital gains: selling for more than you paid. Buy at 50, sell at 60, gain 10 a share. Both can go the other way: dividends get cut, and prices fall below what you paid.

Market capitalisation and indices

Market capitalisation is share price times the number of shares. At 54, Crumb and Co's 1.6 million shares make it worth 86.4 million on the market. That number, not the share price alone, is how companies are compared: a 500 share in a small company can be worth far less in total than a 20 share in a giant.

An index tracks a basket of companies to show how a market is doing: the S&P 500 (500 large US companies, weighted by market value), the Dow Jones Industrial Average (30 US companies), the FTSE 100 in London, the Nifty 50 and the Sensex (30 companies) in India. When the news says "the market fell 2 per cent", it means an index fell. Index funds simply buy every company in an index.

A scene plan for a five minute class video

The bakery story makes a natural sequence of drawings. If your course also covers how a company's profits are reported, the three financial statements, explained visually is the companion piece.

1. One bakery and its two founders holding a whole pie labelled "the company".
2. The pie cut into a million slices: what a share is.
3. The IPO: new slices sold, a bag of money going to the company.
4. The next day: slices passing between investors, money passing between them, the company watching.
5. The order book as two queues facing each other, the spread as a gap between them.
6. A market order arriving and eating through the front of the sellers' queue; the price ticks up.
7. The cast list: broker, exchange, clearing house, regulator, drawn around one trade.
8. The price line wobbling as news arrives: sales up, flour up, rates up.
9. Many pies on one tray: an index.

Scene 6 is the one textbooks cannot show well, because it is about order and timing. How to explain a process in a video covers drawing step-by-step mechanisms like this one.

Make it

1. 1

   Invent one company

   A bakery, a bike maker, a games studio. Give it a share count and an IPO price with round numbers you can say aloud, and say clearly that it is invented.

2. 2

   Build a tiny order book on paper

   Three bids and three asks, then one market order. Work out the new price by hand before you script it, so the numbers on screen are right.

3. 3

   Write one paragraph per scene

   Follow the scene plan above. About 750 words is five minutes at 150 spoken words a minute. Add one plain line saying the video is educational, not advice.

4. 4

   Paste the script into openCanviz

   Choose Keep my wording so every figure is said exactly as written, set a target length, and pick the whiteboard or cutout style so the queues and trades are drawn as you explain them.

5. 5

   Check every number and label

   Pause on each scene and compare figures with your paper workings. Fix any wrong price, share count or exchange name in the editor before you present.

If you want to keep making videos like this, how to make a finance explainer channel covers staying on the education side of the advice line and keeping figures dated.

Common questions

Who sets the price of a stock? Nobody sets it. The price is the last price at which a buyer and a seller agreed to trade on the exchange. It changes every time a new order crosses the spread.

Does a company get money when I buy its shares? Only if you are buying new shares it is issuing, as in an IPO. When you buy on the exchange afterwards, your money goes to the investor who sold.

What is the difference between a stock and a share? In everyday use they mean the same thing. Strictly, "stock" is ownership in companies in general and "shares" are the units: you own shares of Crumb and Co, and you own stocks.

What happens if a company goes bankrupt? Shareholders are paid last, after lenders and other creditors. Often there is nothing left, and the shares become worthless. That is the risk that the possible returns are paying for.

Why do markets fall when interest rates rise? Higher rates make safe savings and bonds pay more, so shares must look cheaper to compete, and they make future profits worth less in today's money. Borrowing also costs companies more.