Stock market basics
The stock market brings together people who want to sell stock with those who want to buy stock. When you buy stock (or equity) in a company, you receive a piece of the company and become a part owner.
The stock market is made up of:
- primary market – where the first sale (or offer) of stock by a private company to the public happens. Learn more about initial public offerings (IPOs).
- secondary market – where any subsequent buying or selling – often called trading – of a company’s stock takes place.
Where stocks are traded
1. Stock exchanges
A stock exchange is an organized market in which an investor can trade securities in a publicly visible manner, under rules that apply to all users of that exchange.
If a company is listed on a recognized stock exchange, it must:
- distribute a certain number of shares,
- file appropriate information about its management team, and
- provide specific financial information.
In the past, stockbrokers used to meet 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. Some of the most widely known stock exchanges in Canada focus on certain kinds of investments:
- Toronto Stock Exchange (TSX) – serves the senior equity markets and lists well-established companies.
- TSX Venture Exchange – serves the public venture equity market and lists emerging companies that don’t meet the listing criteria of the TSX.
- Montreal Exchange – focuses on specialized investments such as stock options and derivatives.
2. Other marketplaces
Stocks are also traded through:
- alternative trading systems (ATSs) – automated trading systems that bring together dealers and institutional investors who trade large quantities of stocks, and
- over-the-counter (OTC) markets – dealer networks where “unlisted” stocks are traded.
How stock prices are set on a stock exchange
The buyer and seller must agree on a price before a stock can be bought or sold. Here’s how it works:
- People compete to buy the stockStock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions.+ read full definition if they believe that its price will rise and they will make a profit.
- Sellers compete to find buyers for their stock at the highest possible price.
- There are usually several investors trying to buy and sell stock in the same company at the same time. It’s like a big computerized auction.
- Once a stock is bought or sold, the price is posted so that everyone knows the latest price.
Key point
For a stock exchangeStock exchange A market in which securities are bought and sold.+ read full definition to be successful, it must be perceived as fair and equitable, where information is public and visible.