Lesson What is the stock market and how does it work?

What is the stock market?

Learn about the stock market and how it works.

  • What the market does
  • How stock prices are determined
  • How to get started buying and selling
A man is checking stock market

Interested in the stock market? It can be a powerful tool to help you reach your financial goals, and can be easier to understand than it may seem. But if you’re feeling intimidated, overwhelmed, or in the dark when it comes to the stock market, don’t worry – you’re not alone in this.

In Canada, this part of the financial world isn’t common knowledge. Less than half of Canadians own stocks – approximately 39% – and participation isn’t everything. Sometimes people who own stocks don’t have a full understanding of the market. Another study found that, among Canadians who do invest, only one third actually know how investing works.

Getting a grasp of what the stock market actually is and how it works is a great step towards having full control over your money and improving your personal finances.

If you’re unsure of what a stock really is we recommend reading this Stock 101 guide first but if you’re already familiar with them feel free to dive right in.

What is the stock market?

If you’re unsure of what a stock really is we recommend reading this Stock 101 guide first but if you’re already familiar with them feel free to dive right in.

Stock market is the term used in reference to all stock exchanges - where investors come together to buy and sell shares of companies from each other.

In the past, the stock market only operated physically at stock exchanges, where people met in-person to buy and sell. Today, these stock exchanges largely operate online as a digital space that allows buyers and sellers to get the same job done.

Globally there are over 60 major stock exchanges. The largest one as of August 2021, is the New York Stock Exchange (NYSE).

These major stock exchanges are regulated by either financial regulators or another authority in the country where they are based. This management of stock exchanges helps offer peace of mind to investors that their transactions will be processed in a legitimate and efficient way.

How it works

So, let's say you want to buy a stock. How does it actually happen? The answer: stock brokers.

The stock market works by having licensed stock brokers trade shares on a stock exchange for buyers and sellers.

Some brokers are still real human beings who work in-person at an exchange, but they are a rarity. Today, most of what brokers do is completed electronically. Platforms like Questrade are an example of this.

Even though much of the brokering is done electronically nowadays, traditional trading hours apply to many stock markets.

For example, in Canada the Toronto Stock Exchange (TSX) is open for trading Monday to Friday, from 9:30 am to 4 pm ET, except for stock market holidays which are announced ahead of time.

How are stock prices determined?

Pricing is a very important part of the market. Put very simply, the price of a share is decided by its supply and demand.

The amount of shares available for sale and the amount of shares buyers want determines how a stock is priced by the market. If a lot of people want to buy stock in one company (high demand) the price may go up. If there are too many people wanting to sell stock (high supply) in one company the price may go down.

How a specific stock price is determined by buyers and sellers in the market most often happens through an auction process. In this process buyers submit the price they are willing to pay (a bid) and the sellers submit the price they would like for their stock (the ask). When the two align, a trade is made.

There are many different types of bids and asks, generally referred to as orders. If you want to learn more about order types you can read more about them in this introduction to investing Order Types.

There are millions of people placing orders on the stock market every day in stock exchanges around the world. This auction process can be vast and quick-moving. This is what causes stock prices to change by the second– either rising or falling in cost. At this speed of trading, sometimes by the time your bid or ask is placed to the time it is traded (which could be fractions of a second), the price may have shifted.

Also, there may not always be a buyer and a seller who instantly match each other in price. In that case some markets use specialists to make constant bids and asks so that trades can be made continuously.

How do I get started buying and selling stocks?

If you’re ready to get started investing or trading on the stock market, here are some ways to get started:

Order-execution only broker

One way would be through order-execution only brokers, also sometimes called online brokers. They are stockbrokers that take your directions on how you would like to invest and handle the actual logistics of making the trades happen on the stock market. This type of broker can be less expensive in comparison to full-service brokers.

CThe fees charged through an order-execution-only broker are usually low. Also, their online functionality makes participating in the stock market accessible and convenient. These types of brokers are great for you if you want complete control over your investments and to save money with usually low fees.

Questrade is an order-execution only broker. A Questrade self-directed account can help you take charge of your investment decisions while also keeping more money in your pocket.

Robo-advisors

Another way people invest is through robo-advisors. Essentially they are digital platforms that give investment portfolio management services, aided through automation.

All portfolios are collections of many financial investments, like exchange traded funds (ETFs). Robo-advisor-run portfolios allow you to invest in the market similar to a mutual fund but typically with lower fees. This cuts down on costs and could boost your savings.

If you’re a beginner in the stock market, wanting some guidance, and also wanting to save money, this could be a great option for you. Questwealth Portfolios offers this service at a low rate and, after answering a few questions about your financial situation and risk tolerance, gives you a portfolio that will help you get to your goals. There are also socially responsible investment (SRI) portfolios available.

Full-service broker

Finally there are full-service brokers. They use their knowledge of finance and investing to advise you and manage your investments and some also give input on your financial planning.

But something to note is that full-service brokers can charge hefty fees for their service, making them the most expensive option of the three.

Get started

Now you know about the ins and outs of the stock market, you can choose the method of investing in the market that’s right for you.

If you’d like to put yourself fully in the driver’s seat when it comes to your investments, a Questrade Self-Directed Investing Account gives you the control you may be seeking. These accounts allow you to give orders on which stocks, ETFs, options, etc. you would like to buy or sell while also saving you money on fees.

Or, if you’d like an even easier way to invest your money, Questwealth Portfolios are a low-cost way to get a diversified portfolio of ETFs.

A final word

The hardest part of making progress on anything is getting started. So, congratulations on taking the first step and learning about the stock market. Now that you know the basics, it will be easier to decide what your investment goals are and pick which method works for you.

We’re always here with information and resources to help you out.

Note: The information in this blog is for educational purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied, is made by Questrade, Inc., its affiliates or any other person to its accuracy.

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