If you’ve ever wondered how the stock market works, you’re not alone. Many people hear about the stock market, see big numbers in the news, and hear about investors getting rich. But how does it really work? In this article, we’ll break down the stock market in simple, easy-to-understand terms so you can feel confident about what’s happening in the world of stocks.

We’ll cover how stocks are bought and sold, how stock prices move, and how people can make money (or lose it) in the stock market. By the end, you'll have a clear understanding of what the stock market is, how it functions, and how to think about it if you want to invest your money.

What is the Stock Market?

The stock market is essentially a marketplace where people can buy and sell shares of companies. A share is a small ownership stake in a company. When you buy a share of a company, you become a partial owner of that company. For example, if you buy shares in Shopify, you’re a part-owner of Shopify.

Why do companies sell shares?

Companies sell shares to raise money. When a company wants to expand, build new products, or pay off debt, it can issue (sell) shares to the public. The money they raise from selling shares is used to fund their projects. This is often done through an event called an Initial Public Offering (IPO), which is when a company first sells its stock to the public.

After the IPO, the company’s shares are traded on the stock market. For example, if you want to buy shares in Shopify after its IPO, you would go to the stock market to do so.

How Do Stock Prices Move?

Stock prices are determined by supply and demand. When a lot of people want to buy shares in a company, the price goes up. If fewer people want to buy the shares, the price goes down.

Imagine a company called ABC Electronics that makes smartphones. The company is doing well, and people think it will grow even more. Many people want to buy shares in ABC Electronics because they believe the price will go up. So, the price of the stock rises.

On the other hand, if something goes wrong—let’s say ABC Electronics faces a lawsuit or their latest smartphone is not selling well—people might start selling their shares. As more people sell, the stock price will drop.

In short, stock prices move based on how many people want to buy or sell a stock at any given time.

The Role of Stock Exchanges

In Canada, the main stock exchange is the Toronto Stock Exchange (TSX). Think of the stock exchange as a giant market where all the buying and selling happens. Just like how you buy things at a store, the stock exchange is where you go to buy shares of companies.

When you buy shares, you don’t physically exchange money with the person selling the shares. Instead, you place an order with a broker—either through an online trading platform or a full-service broker. The broker connects you to the stock exchange and helps you buy or sell shares at the current price.

Buying and Selling Stocks

So, how exactly do you buy and sell stocks?

Choose a Brokerage

Before you can buy stocks, you need to open an account with a brokerage. A brokerage is a company that helps people buy and sell stocks. In Canada, there are many online brokerages like Questrade, WealthSimple Trade, or TD Direct Investing that make it easy to buy and sell shares. Some brokerages charge commissions (fees) for each trade, while others, like WealthSimple, offer commission-free trading.

Placing an Order

Once you’ve set up your brokerage account and added money, you can place an order to buy stocks. There are two main types of orders:

Market Order: This is the most common order. It means you want to buy the stock at the current market price, and your order will be filled immediately.

Limit Order: With a limit order, you specify the price you’re willing to pay for the stock. Your order will only be filled if the stock reaches that price.

Sell Your Shares

When you’re ready to sell your shares, you can place a sell order. If the stock price has gone up since you bought it, you can sell your shares for a profit. If the price has gone down, you may sell at a loss.

How Do People Make Money in the Stock Market?

There are two main ways people make money in the stock market: through capital gains and dividends.

1. Capital Gains

Capital gains occur when you sell a stock for more than you paid for it. For example, if you buy a share of XYZ Inc. for $10, and the stock price rises to $15, you can sell your share and make a $5 profit.

Here’s how it works mathematically:

You buy 10 shares of XYZ Inc. at $10 each, so you spend $100.

The price of XYZ Inc. increases to $15 per share.

You sell all 10 shares at $15 each, earning $150.

Your profit is $150 (sale price) - $100 (purchase price) = $50 in capital gains.

2. Dividends

Dividends are payments made by a company to its shareholders. Not all companies pay dividends, but those that do usually pay them quarterly. Companies that pay dividends are often larger, established companies that have steady profits.

Here’s how dividends work:

Let’s say you own 100 shares of Royal Bank of Canada (RBC), which pays a dividend of $1.25 per share.

RBC pays this dividend four times a year.

Each time they pay the dividend, you earn $1.25 per share, so for 100 shares, you’ll earn $125.

Over the year, you’ll earn $500 in dividends (since $125 x 4 = $500).

Dividends are a way to earn money even if the stock price doesn't change. Some investors love dividend-paying stocks because they provide regular income.

Risks of Investing in the Stock Market

While the stock market offers opportunities to make money, it’s important to remember that investing in stocks carries risks. Here are a few risks you should be aware of:

Market Risk: This is the risk that the overall market will decline. For example, during a recession, stock prices can fall across the board, even for companies that are doing well.

Company Risk: This is the risk that the company whose stock you own may do poorly, even if the overall market is doing well. For instance, if a company faces a scandal or poor earnings, its stock price can fall even if the stock market is up.

Volatility: Stock prices can be very volatile, meaning they can rise or fall quickly. If you’re investing for the short term, you could face losses if the market swings in the wrong direction. However, if you’re a long-term investor, these fluctuations often don’t matter as much because the stock price tends to rise over time.

Understanding Stock Market Indices

A stock market index is a collection of stocks that are grouped together to represent a particular segment of the market. In Canada, the most popular stock market index is the S&P/TSX Composite Index. This index tracks the performance of 200 of the largest companies listed on the Toronto Stock Exchange.

Investing in an index fund or ETF (Exchange-Traded Fund) that tracks an index is one way for Canadians to invest in a broad range of companies at once, rather than picking individual stocks. Index funds and ETFs are popular because they offer instant diversification and tend to have lower fees.

For example, if you invest in an S&P/TSX Composite Index ETF, you’re indirectly investing in many of Canada’s top companies, like Royal Bank, Shopify, and Enbridge. Instead of trying to pick individual winners, you're betting on the overall performance of the Canadian market.

The Role of Brokers and Fees

When you buy and sell stocks, you’ll likely encounter brokerage fees. Some brokerages charge commissions for each trade, while others (like WealthSimple Trade) don’t charge any fees for buying or selling stocks.

Even if you’re using a platform with no commission fees, there may still be other fees, such as:

Management fees for mutual funds or ETFs.

Currency conversion fees if you’re buying stocks listed on U.S. exchanges.

Account fees for maintaining your account.

It’s important to understand the fees involved, as they can add up over time and affect your overall returns.

Should You Invest in the Stock Market?

Whether you should invest in the stock market depends on your financial goals, risk tolerance, and time horizon. If you’re saving for a long-term goal, like retirement, the stock market can be a great place to grow your money. Historically, the stock market has offered strong returns over long periods.

However, if you need access to your money in the short term, or if you’re not comfortable with the potential for loss, you might want to consider safer investment options like bonds or savings accounts.

How the Stock Market Really Works

The stock market is a powerful tool for building wealth, but it’s important to understand how it works before diving in. By buying shares of companies, you can become a partial owner of those companies, and make money through capital gains or dividends. However, the market can also be unpredictable, and you can lose money if things don’t go as planned.

If you're new to investing, start by learning as much as you can and consider speaking to a financial advisor. And remember, investing in the stock market is a long-term commitment—it’s not about getting rich overnight, but about growing your wealth steadily over time.

Now that you have a clear understanding of how the stock market works, you can confidently start thinking about how to make it work for you.