What the stock market actually is.

— Anatomy of the market

The phrase "the stock market" papers over four different things. The exchanges are the plumbing. The indices are the scoreboard. The participants are the players. The trading hours are the window the whole machine runs in. Keep them separate and the rest of the vocabulary stops being mystifying.

Exchanges

There are two exchanges you have heard of. The New York Stock Exchange still has a physical floor, still has designated market makers who step in on the opening and closing auctions, and still uses that floor for ceremonial bell-rings and the occasional newspaper photo. Almost all of its actual matching happens in a server farm in Mahwah, New Jersey. The NASDAQ never had a floor. It started in 1971 as an electronic dealer network and has always matched orders in software. Functionally the two look identical on your end. The company chose one at listing time, usually for branding, and that choice is now a fact of its identity.

Behind those two, there are more than a dozen smaller exchanges and a long list of dark pools, which are private venues where big trades can be matched without moving the public tape. You will never interact with these directly. Your broker does, on your behalf, and the rules that govern how they route your order are the whole reason the SEC exists.

Indices

An index is a specific formula applied to a specific basket of stocks. The S&P 500 takes the 500 largest US companies by market cap and weights each one by its market cap, which means the biggest companies move the index the most. This is how most people would design an index if they were designing one today.

The Dow Jones Industrial Average is thirty stocks and weights them by their share price. Not their market cap. Their share price. A company whose stock trades at $500 has five times the weight of a company whose stock trades at $100, regardless of which one is actually the larger business. This is a quirk of arithmetic from 1896, preserved out of tradition, and it is why serious people quote the S&P and use the Dow mostly for headlines.

The Nasdaq Composite is every company listed on the NASDAQ, which tilts heavily toward tech. The Russell 2000 is the next two thousand companies after the largest thousand, which is how people in this business talk about small caps without having to define "small cap." Different indices, different stories, same market underneath.

Participants

Retail is you, and the rest of the people who open brokerage apps in the evening and push buttons. Institutional is pension funds, endowments, insurance general accounts, mutual funds, and hedge funds, which together manage most of the dollars that actually trade. They move in size and on mandates, not on vibes. High-frequency traders are algorithms that make money on microsecond price differences across venues. They do not care what a company does or what its earnings look like. They care that a quote on one exchange is a penny stale relative to a quote on another exchange, and they can tell the difference faster than you can blink.

Market makers are the ones in the middle. They commit to continuously quote a bid and an ask, and they earn the spread between them. When you buy, they sell to you. When you sell, they buy from you. Without market makers there is no liquid market, because somebody has to be on the other side of every trade, and most of the time nobody else wants to be.

Trading hours

Regular trading hours are 9:30 a.m. to 4:00 p.m. Eastern, Monday through Friday, minus a handful of federal holidays. This is when most of the volume lives and when the opening and closing auctions happen. Pre-market is 4:00 a.m. to 9:30 a.m. Eastern, and after-hours is 4:00 p.m. to 8:00 p.m. Eastern. Both exist, but liquidity outside regular hours is thinner, spreads are wider, and the prices you see can move on not very much volume.

When a company reports earnings after the close and the stock gaps 8% before the next open, that is after-hours trading doing its job on very thin volume. By 9:30 the next morning, most of that gap has been either confirmed or partially erased by the full market showing up. The news breaks when it breaks. The market opens when it opens. The gap between the two is where a lot of the drama lives.