What’s the stock market and why is it important?

Getting to know the stock market

Whether you have a little extra cash you’d like to invest or you have a Registered Retirement Savings Plan (RRSP), you may be interested in investing in the stock market. But before jumping in, it’s good to have an understanding of what it is and how it operates. To help you get started, we’ll answer five key questions in this article:

1 What’s a stock?

2 What’s the stock market?

3 What are stock exchanges?

4 What’s a broker?

5 Why is the stock market important?

1 What’s a stock?

A stock is a type of investment that represents ownership of a company. A company’s overall stock is broken into shares, each of which equates to an equal-sized portion of the business.

For example, let’s say you’ve started a business using your own money, and you need more money to be able to expand. You could get that money by taking a loan from a bank or by finding private investors on your own or you can sell part of your business by issuing shares of stock and going public. Going public means that shares of your stock will be available for purchase by the public.

2 What’s the stock market?

The stock market is where a broker goes to buy shares of stock. In many ways, it’s just like any other kind of market, such as a grocery store or farmers market. A farmers market is a central location where several different farmers can gather to sell their goods. Customers can walk around the market, look at all the options, and buy what they want.

The stock market is very similar—it refers to a central spot where people come together to buy and sell stocks and other investment vehicles. But instead of being one single market, the stock market is made up of a few smaller markets, called stock exchanges.

3 What are stock exchanges?

Stock exchanges are the businesses that actually facilitate the buying and selling of stock. Stock that’s available on one exchange is generally not available on other exchanges. You’ve likely heard of one of these large stock exchanges.

• TSX (Toronto Stock Exchange)
• The New York Stock Exchange (NYSE)
• The NASDAQ

All stock exchanges operate online. Although you can visit the TSX in Toronto’s financial district, most exchanges operate exclusively online.

But you can’t just walk into the TSX building, go up to the counter, and put in an order to buy 10 shares of ABC company. To buy shares, you need to work through a broker.

4 What’s a broker?

Brokers are individuals or companies that can buy and sell stock through the stock exchanges for their clients. If you wanted to buy 10 shares of a company, you’d have to:

1 Set up an account with a broker

2 Deposit money into your account 

3 Submit an order to buy 10 shares of the company with the cash in your account

Your broker would take your order and use your cash to buy the stock you want from someone else who wants to sell the same stock. If you have a brokerage account, you can invest in stocks, bonds, mutual funds, and many other types of investments. 

5 Why is the stock market important?

The stock market helps both businesses and investors by:

• Offering companies a place to raise money to help grow their business and the economy 
• Enabling individuals to choose from a wide range of investments and give their retirement savings a chance to grow in value over time

The value of the stock market and the value of the shares traded in a single day are an important part of the economy. They indicate how the companies in the stock market are performing, how people feel about the companies in the stock market, and how people feel about various aspects of the economy. That’s why you hear that the stock market is up (people are generally feeling good about the market) or down (people are generally feeling bad about the market) on a given day.

To make it easy to measure the performance of the stock market, most people use a stock market index. There are several well-known indexes available (e.g., the Dow Jones Industrial Average (DJIA), the S&P 500 Index, the S&P/TSX Composite Index), and they all do the same thing: track the changes in value of a representative group of companies. When the index goes up, the collective value of the stocks it follows has increased; when the index goes down, the value of the stocks has gone down. Usually when you hear a news report that the market is up or down, it refers to an index.

Over time, the value of the stock market tends to grow, as you can see below, which looks at the DJIA—also called the Dow—as an indicator of the market’s performance. (The DJIA tracks 30 of the country’s largest publicly owned companies.) As you can see, there can be a lot of change from day to day or month to month—referred to as market volatility. But you can also see that over longer periods of time, the value of the market has historically gone up. 

Despite occasional downturns, the stock market has gone up since 1971

The stock market, investing, and your retirement plan

The stock market offers vast investment opportunities to the general investor. If you consider opening a brokerage account, you’ll have access to stocks and bonds, mutual funds, and many other types of investments.