Stock Market 101

Let’s break it down, starting with the basics. Stocks, also known as equities, are a security representing partial ownership of a publicly traded company. So, when you buy stocks in a company, it means you own a part of that company. A share is the unit of stock; the more shares you buy, the more stock you have in a company. Stocks are issued by companies to raise money to grow their business.

There are two main types of stocks, one is called a common stock and the other is a preferred stock. The main difference between the two is that common stocks give shareholders the right to vote on company matters and participate in the growing earnings of the company while preferred stocks don’t. Preferred shares may come with a higher fixed dividend payout.

The stock market is a trading network that connects investors looking to buy and sell stocks and their derivatives.

An easy way to think about think about the stock market is to consider it as a network of stock exchanges where traders and investors buy and sell shares of publicly traded companies.

Private companies list shares of their stock on an exchange through a process called an initial public offering (IPO). Investors purchase those shares, which allows the company to raise money from the public to grow its business. Once the company is listed on a stock exchange it is now a public company and investors can buy and sell the company’s shares on an exchange which tracks the stock price.

The supply and demand helps determine the price for each security at which investors and traders are willing to buy or sell.

The terms “stock market” and “stock exchange” are often used interchangeably, but they are actually two different things. The stock market is made up of a number of individual stock exchanges.

Stock exchanges are where stocks and other types of investments are bought and sold. Examples include the New York Stock Exchange (NYSE), NASDAQ, Toronto Stock Exchange, London Stock Exchange, the Shanghai Stock Exchange and the Tokyo Stock Exchange. Different stock exchanges are subject to different internal rules and local and national laws created to ensure fair trading practices and investor confidence. Stock exchanges report on security prices in real-time for transparency of transactions as well as to make it easy for investors and financial news sites to track and report on any price changes.

The size of a stock exchange is directly related to the number and size of companies that are listed on the exchange. Below are three of the most commonly known American and Canadian stock exchanges

TSX is located in Toronto, Canada. It is the 9th largest exchange in the world by market capitalization¹ . A wide range of companies from Canada and all over the world are listed on this exchange.

NYSE is an American stock exchange in the Financial District of Lower Manhattan in New York City and is the world's largest stock exchange¹ by market capitalization of its listed companies with billions of trades happening daily.

NASDAQ is an electronic marketplace based in the United States and is focused on high technology listings. It is ranked second on the list of stock exchanges by market capitalization of shares traded¹, behind the New York Stock Exchange.

To better understand how the stock market works, it helps to know that there are two types of markets: the primary market and the secondary market.

The primary market is where securities are created, and a company lists their shares through an IPO. Remember, an IPO is when a company first lists their shares publicly.

The secondary market, which is essentially the stock exchange, is where the supply and demand of these shares (along with the thousands of other stocks on the market) are bought, sold, and traded every day.

Purpose of Indices:

Usage: Investors use indices to track market trends, assess economic conditions, and make investment decisions. Stock market indices serve as benchmarks for measuring investment performance s. Investors and analysts use these benchmarks to compare the performance of individual stocks, or a portfolio of stocks, with the performance of the indice. The S&P 500 is commonly used as a benchmark of general market performance.

Market Sentiment: Changes in indices may tell you a lot about the overall health of the market. A rising index may indicate positive market sentiment and investor confidence, while a falling index may signal economic concerns or negative investor sentiment.

Basis for ETFs: Indices are also used as the basis for index funds and exchange-traded funds (ETFs) which allow investors to invest in a broad of companies by owning one product..

Function:

Composition: Indices are a group of stocks selected to represent a specific segment of the market. The selection criteria can vary but typically includes things like market capitalization, liquidity, and industry representation.

Weighting: Indices can be weighted in different ways:

• Price-Weighted: In a price-weighted index, such as the Dow Jones Industrial Average (DJIA), stocks with higher prices have a greater influence on the index's value.
• Market Cap-Weighted: In a market capitalization-weighted index, such as the S&P 500, stocks with larger market capitalizations have a greater impact on the index.
• Equal-Weighted : In an equal-weighted index, all stocks have the same influence regardless of their price or market capitalization. However, such stocks can typically have higher MER fees as they require constant rebalancing to avoid concentration as price changes.

Examples :

Dow Jones Industrial Average (DJIA): A price-weighted index composed of 30 large, publicly-owned companies in the U.S.

S&P 500: A market cap-weighted index that includes 500 of the largest U.S. companies.

NASDAQ Composite: A market cap-weighted index that includes all stocks listed on the NASDAQ stock exchange.

FTSE 100: A market cap-weighted index that comprises the 100 largest companies listed on the London Stock Exchange.

Economic Indicators:

Gross Domestic Product (GDP): GDP measures the total value of goods and services produced in a country over a certain period. Strong GDP growth indicates a healthy economy, which can boost investor confidence and stock prices.

Unemployment Rate: The unemployment rate shows the percentage of the workforce that is unemployed but seeking employment. A low unemployment rate suggests a strong labor market, which can positively impact consumer spending and corporate profits.

Inflation: Inflation measures the rate at which the general level of prices for goods and services are rising. Moderate inflation can be a sign of a growing economy, but high inflation can erode purchasing power and hurt corporate profits.

Interest Rates: Central banks, such as the Bank of Canada or the Federal Reserve in the US, set interest rates to control monetary policy. Lower interest rates make borrowing cheaper, encouraging investment and spending, which can drive up stock prices. Higher interest rates can have the opposite effect because they encourage saving over spending.

Company Performance:

Earnings Reports: Earnings reports provide information on a company’s financial performance. Strong earnings can lead to higher stock prices, while weak earnings can cause stock prices to fall.

Revenue Growth: Investors use a company's revenue growth as an indicator of its overall health and future prospects. Consistent revenue growth can attract investors and drive stock prices up.

Product Launches and Innovations: Successful new products or innovations can boost a company's market position and profitability.

Share prices are determined by supply and demand. If demand from buyers is greater than supply from sellers, the price goes up. But if the opposite is true, the price goes down. The stock price is determined by the last price a buyer and seller agreed on. Hence, stock prices can change frequently as buyers and sellers constantly negotiate new prices with each other.

Over the long-term, the demand for publicly traded stocks is usually determined by how profitable a business is. As a company’s earning power increases, demand for its stock, and its price, will tend to increase as well.

When it comes to trading shares on a stock exchange, there are two main types of investing strategies. Day trading, as the name implies, buying and selling the same shares within one day, sometimes making trades that last for just minutes or even seconds. The intent is to take advantage of small fluctuations in price. Then, there are more long-term trades or investments where the buyer holds shares for longer periods of time and hopes to take advantage of the company’s long-term growth in earnings.

The stock market serves two important purposes. First, it helps companies raise money often referred to as capital from the public by offering shares for sale, which can be used to fund and expand their business. Secondly, it gives an investor, who purchases those shares, an opportunity to have a share in the company’s profits. Investors can profit from owning stocks in one of two ways. Some stocks pay regular dividends (a given amount of money per share) at regular intervals which provides a return on the amount of money invested in the shares. Alternatively, a return can also be earned through capital appreciation which is when the stock price increases.

Discount Brokerage
Rather than provide financial consulting or planning services, discount brokerages are a form of direct investing (or online investing), which provide self-directed investors access to online market research, online education, and a range of direct-access trading platforms. For example, with TD Direct Investing, you're able to make trades over the phone, online, or through an app. Keep in mind that even though commissions may be lower, there can be a monthly fee associated with the more complex platforms. However, with TD Direct Investing, you may qualify for a waived maintenance fee, free streaming market data, and lower trading commissions.

The most obvious reason to consider investing in the stock market is to help grow your money over time. You’re also supporting other companies to grow and supporting the economy as a whole.

Although it takes time to understand the stock market and how it works, once you do, technology has made it easy to be involved with your own financial portfolio. By investing, you can also increase your financial literacy.

Of course, there are risks associated with investing in the stock market. You do need to educate yourself and invest wisely.