The stock market brings together those who want to sell investments with those who want to buy investments. Many common investments involve the stock market. Learn more about how it works.
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What is the stock market?
The stock market does not refer to one specific place, but to several marketplaces or exchanges where stocks and other investments are bought and sold. Stocks represent part ownership in a company. If the company grows in value, then so does the value of the stock.
When people invest in the market, they are using their money to buy assets that may later grow in value. In other words, people hope to make a return on their investment.
The stock market brings together people who want to sell stock with those who want to buy stock. Buying stocks — also known as shares — allows investors to own part of the company. Selling shares allows companies to raise capital to grow their business. Investors could make a profit if the value of the shares they purchase goes up.
Investing in the stock market can be done in different ways. You can buy or sell shares through an investment firm, or through an online advisor. Or, you can invest in funds — mutual funds or exchange-traded funds (ETFs) — which are composed of many different stocks or other investments such as bonds.
There are two types of markets:
- Primary – When a company first makes shares of their private company available to the public, it is called an initial public offering. This is often called going public. This type of activity is the primary market.
- Secondary – Any further buying or selling of the company’s shares — often called trading — is considered the secondary market. These types of transactions are done through marketplaces, such as exchanges.
Investing in the stock market means that the value of your investments can go up over time, as the companies grow their business and as the economy grows. Investments can potentially give higher rates of return than the rate of inflation.
However, this also means there is potential for the investment to go down in value, depending on the economy and the type of investment. When you invest, you are exposed to a number of different types of risk. You can make money in the stock market if you sell your investments at a higher price than what you paid for them, or by receiving dividends.
Both saving and investing are important. Investing can help you reach different types of goals than saving. Learn more about saving versus investing.
What is a stock exchange?
A stock exchange is part of the stock market. It is an organized market where an investor can trade securities. This is done in a publicly visible manner with rules that apply to everyone who uses that exchange.
In the past, stockbrokers met to buy and sell stock in a physical location. They would send trade instructions to the trade floor and traders would execute the trades in person. All stock trades are now done electronically. Technology now makes it possible to trade faster than the blink of an eye.
The modern marketplace still brings together multiple buyers and sellers. But now it includes electronic exchanges and alternative trading systems. These marketplaces were introduced to promote innovation and enhance investor choice. They also allow more transparency of stock prices.
You may already be familiar with some stock exchanges in Canada and the world, such as:
- Toronto Stock Exchange (TSX)
- National Association of Securities Dealers Automated Quotations (NASDAQ)
- New York Stock Exchange (NYSE)
- London Stock Exchange (LSE)
There are also alternative trading systems. They’re like an exchange — but have more limited functions. Alternative trading systems include:
- Tradelogiq Markets (Omega / Lynx)
- MatchNow
- Liquidnet Canada
- Instinet Canada Cross (ICX)
There are rules for trading securities or derivatives on both exchanges and alternative trading systems.
If you’re considering investing in a company, it’s a good idea to do some research to make sure it is a good fit for your investment goals. Learn more about where to get information on a company before investing.
How is the stock market tracked?
You have likely heard news reports referring to the stock market being “up” or “down” on a certain day. When people talk about the market this way, they are usually referring to an index. An index is a collection of securities that represents the performance of a portion of the market.
Some examples of indices are:
- S&P/TSX Composite index – the Canadian equities market. This index contains stocks of the largest companies on the Toronto Stock Exchange
- S&P 500 – the U.S. Equities market. This index contains stocks of 500 large companies with common shares listed on the New York Stock Exchange or the NASDAQ Stock Market.
Other indices may track specific types of investments, such as bonds, or specific industries, such as the energy sector. Indices like these give investors a general idea of whether trades within these markets are experiencing upward or downward momentum.
Learn more about indices and index funds.
You can invest in the markets in different ways. Deciding whether to be an active or passive investor is a key decision to make as you get started.
What makes the stock market go up or down?
The stock market fluctuates. This means investments can also fluctuate in value day to day. This is often called volatility.
Keep in mind that the stock market is composed of many different companies, industries and investors. As a result, there are several factors that can cause the market to fluctuate, including:
- Industry performance.
- Company performance.
- Investor sentiment about a specific company or industry.
- Broader economic factors including interest rates, economic outlook, or inflation.
Different investments will have different exposure to these market factors, as well as different types of risk. How much your investments go up or down as market fluctuates depends on the composition of your portfolio.
What are bull and bear markets?
A bull market happens when investors are optimistic about companies’ growth potential and profit outlook. In a bull market, stock prices generally rise for an extended period of time until hitting a peak.
The opposite is a bear market. In a bear market, investors turn pessimistic and stock prices generally decline for a period of time, before hitting bottom.
While bear and bull market swings can be frequent, they’re also hard to predict. Each bull and bear swing is different.
A bear market, or any period of market decline, can be a challenge to navigate. Here are 5 things investors can do to respond to a bear market:
- Diversify – A portfolio with a mix of investments — that behave differently in market cycles — can help you mitigate market swings. While some market swings can still affect your whole portfolio, diversification can help dampen the effects.
- Stay calm – Be mindful about the risks of loss aversion. If you sell investments when the market is on its way down, you lock in your losses.
- Keep focussed on the long-term – Market fluctuations are cyclical. If you invest for a long-term goal, in a diversified portfolio, then you might consider letting the cycle run its course.
- Revisit your risk tolerance – If the prospect of a bear market keeps you up at night, it could be a sign to adjust your risk level. If you work with an advisor, this is something you should do regularly. If you’re approaching a big goal such as retirement, you may want to talk about rebalancing your portfolio to avoid a major loss at the wrong time.
If you’re interested in investing, be sure to also consider your financial goals and the level of risk that is right for you. You can also work with an advisor to build your portfolio and your investing plan.
If you’re not sure whether you’re ready to invest, try our Investor Readiness Quiz.
Summary
The stock market is actually several marketplaces where stocks are bought and sold.
- Stocks represent a part ownership of a company. If the company grows in value, then so does the value of the stock.
- Investments traded on the stock market include stocks, bonds, mutual funds, and ETFs.
- Investments that aren’t traded on the stock market can still be affected by fluctuations in the market.
- Market fluctuation is when the market increases or decreases in value. The speed and frequency of changes in the market are known as volatility.
- A bull market is a sustained increase in value.
- A bear market is a sustained decline in value.
- Market activity is tracked through several indexes including the S&P 500 and the TSX.
- You can’t predict exactly how the market will behave. But you can manage your risk by diversifying your portfolio, focussing on long-term goals, and investing within your risk tolerance.
