How the stock market works

The stock market connects people who want to buy investments with those who want to sell investments. Many popular investment options, including stocks, mutual funds, and ETFs, are traded through the stock market. Understanding how the stock market works is an important step toward smart investing.

The stock market is not a single physical location. Instead, it is a network of exchanges and marketplaces where stocks and other financial instruments are bought and sold. Stocks, also called shares, represent partial ownership in a company. When a company grows and performs well, the value of its stock may also increase.

When people invest in the stock market, they use their money to purchase assets that have the potential to increase in value over time. The main goal of investing is to earn a return on investment.

The stock market allows companies to raise money by selling shares to investors. Investors, in return, gain ownership in the company and may earn profits if share prices rise. Investors can also generate income through dividends, which are payments made by some companies to shareholders.

There are several ways to invest in the stock market. Investors can buy or sell shares through an investment firm, an online trading platform, or a financial advisor. Another option is investing in mutual funds or exchange-traded funds (ETFs), which pool money into a collection of stocks, bonds, or other assets to reduce risk.

Types of Stock Markets

There are two main types of stock markets:

• Primary Market – When a company offers its shares to the public for the first time, it is called an Initial Public Offering (IPO). This process, often referred to as “going public,” takes place in the primary market.
• Secondary Market – After the IPO, shares are traded among investors in the secondary market. These transactions happen on stock exchanges and trading platforms.

Risks and Benefits of Stock Market Investing

Investing in the stock market can help investors build wealth over time as businesses grow and economies expand. Stock market investments often provide returns that can outpace inflation, supporting long-term financial goals and wealth creation.

However, stock market investing also involves market risk. Investment values may increase or decrease due to economic conditions, company performance, interest rates, or overall market trends. Investors can generate returns by selling shares at a higher price than their purchase cost or by earning dividend income from profitable companies.

Both saving and investing are essential parts of sound financial planning. Saving helps preserve money and manage short-term needs, while investing focuses on long-term growth. Understanding the difference between saving and investing can lead to more informed and confident financial decisions.

What Is a Stock Exchange?

A stock exchange is a key component of the stock market. It is an organized marketplace where investors can buy and sell securities such as stocks and derivatives under standardized rules. These rules ensure transparency, fairness, and equal access for all participants.

In the past, stock trading took place on physical trading floors, where brokers executed trades in person. Today, stock trading is fully electronic, allowing transactions to be completed in fractions of a second using advanced technology.

Modern financial markets connect buyers and sellers through electronic exchanges and alternative trading systems. These platforms increase efficiency, promote competition, improve price transparency, and give investors more trading choices.

Some of the most well-known stock exchanges around the world include:

• Toronto Stock Exchange (TSX)

• NASDAQ

• New York Stock Exchange (NYSE)

• London Stock Exchange (LSE)

There are also alternative trading systems (ATS), which operate similarly to exchanges but with more limited functions. Examples include:

• Tradelogiq Markets (Omega / Lynx)

• MatchNow

• Liquidnet Canada

• Instinet Canada Cross (ICX)

Both stock exchanges and alternative trading systems follow strict regulations for trading securities and derivatives to protect investors and ensure market integrity.

Before investing in any company, it is important to research the business, its financial health, and how it aligns with your investment goals.

How Is the Stock Market Tracked?

When the news reports that the stock market is “up” or “down,” it usually refers to a market index. An index measures the performance of a specific group of securities, providing a snapshot of overall market movement.

Popular stock market indices include:

• S&P/TSX Composite Index – Tracks the performance of large Canadian companies listed on the TSX.

• S&P 500 – Represents 500 major U.S. companies listed on the NYSE and NASDAQ.

Other indices focus on specific sectors, such as energy or technology, or asset classes like bonds. These indices help investors understand whether markets or industries are showing upward or downward trends.

Investors can access the market in different ways. One of the first decisions to make is whether to follow an active investing strategy, which involves frequent trading, or a passive investing approach, such as investing in index funds for long-term growth.

What Makes the Stock Market Go Up or Down?

The stock market is constantly changing, meaning investment values can rise or fall on a daily basis. These short-term movements are known as market volatility.

The stock market is made up of many companies across different industries, along with millions of investors. Because of this, several factors influence whether the market moves up or down, including:

• Industry performance – How well a specific sector, such as technology or energy, is performing

• Company performance – Earnings, growth prospects, and financial stability of individual companies

• Investor sentiment – How confident or fearful investors feel about a company, sector, or the overall market

• Economic conditions – Factors such as interest rates, inflation, employment data, and economic growth outlook

Each investment responds differently to these factors and carries its own level of risk. The extent to which your investments fluctuate depends largely on how your investment portfolio is structured and diversified.

What Are Bull and Bear Markets?

A bull market occurs when investors are confident about economic growth and company profits. During a bull market, stock prices generally rise over an extended period, often reaching new highs.

In contrast, a bear market happens when investor confidence declines. In a bear market, stock prices fall for a sustained period, often due to economic slowdowns, rising interest rates, or negative news.

Bull and bear markets are a natural part of investing, but they are difficult to predict. Each market cycle is unique, and no two market swings are exactly the same.

How to Respond During a Bear Market

Market downturns can be challenging, but investors can take steps to manage risk and stay on track. Here are five strategies to consider during a bear market:

• Diversify your portfolio
  Holding a mix of investments that perform differently in various market conditions can help reduce overall risk. While diversification cannot eliminate losses, it can help soften market swings.
• Stay calm and avoid panic selling
  Emotional decisions driven by fear can lock in losses. Selling when prices are falling may prevent you from benefiting when markets recover.
• Focus on long-term goals
  Market cycles are temporary. Investors with long-term objectives may benefit from staying invested and allowing markets time to recover.
• Review your risk tolerance
  If market downturns cause significant stress, it may be a sign that your portfolio carries more risk than you are comfortable with.
• Rebalance when needed
  As major goals such as retirement approach, adjusting your portfolio to reduce risk may help protect against large losses at the wrong time.