What Is the Stock Market: What It Is and How It Works

A stock market is a place for people to buy and sell stocks. It is what connects buyers and sellers of stocks and allows you to purchase shares in a company and sell your shares when you want out. The stock market for a long time, and it continues to grow in complexity every year. If it sounds complicated, don't worry, I'll break it down so you can understand how the stock market works!

What is the stock market in simple terms?

The stock market is a place for people to invest in publicly traded companies like Google, Blackberry, Tesla. The stock market is a place where stocks are traded between investors.

Stocks are units of ownership in corporations that represent part of the company's assets and earnings.

When you buy individual stocks, you become part-owner of the company.  Investors who purchase stocks of a company hope that the company will do well and their investment will be worth more.

Investors buy individual stocks in what is called a "share." A share of stock represents one unit of ownership in the company. It entitles the shareholder to the company's profits through equity when the stock prices increase and/or dividends. Dividends are payments certain publicly traded companies make to share a portion of their profits with their shareholders.

Dividends are payments a company makes to share profits with its stockholders. They're paid regularly, and they are one of the ways investors earn a return from investing in a stock.

Shares can be bought or sold at any time on an exchange like Toronto Stock Exchange (TSX ), NASDAQ, New York Stock Exchange (NYSE), or the London Stock Exchange (LSE) through what is called trading.

You may also have heard of the New York Stock Exchange (NYSE) and the NASDAQ, as they are two of the world's most well-known stock market exchanges.

Back in the day, investors who traded stocks would go to what is known as a "trading floor" which has large rooms filled with traders, buyers, sellers, and computers to buy and sell shares. You've probably seen it in movies with all the traders on the phone and tons of screens with the very intimidating trading views.

However, nowadays, you can do it from your home's comfort through many trading apps such as Questrade, Wealthsimple Trade.

Keep in mind that to buy and sell stocks in the stock market, you must go through a licensed broker that completes the trade for you.

For example, if you want to buy Tesla shares what do you have to do?

You have to go onto an online broker like Questrade or Wealthsimple Trade, and you can decide what shares you want, how many shares of that company you're looking to purchase, the price at which you wish to purchase those shares, and when you want the order executed.

What are the basics of the stock market?

When it comes to investing in the stock market, it's important to note that a stock's price fluctuates based on the demand for that stock; if there are many buyers, then the stock will increase in value and vice versa. This is based on supply and demand. The demand can vary significantly from the good earnings, long-term potential, pandemics, scandals and much more.

The stock market provides an opportunity to set aside money and have it work for you to reap the rewards later in life without having to bear the risks and responsibilities of starting a company yourself.

As an investor, you must understand what you are looking at when you invest. That's why it's recommended to seek out an investment advisor before going ahead with any kind of investment.

Remember to always do your research before investing in any company.

What are the risks of investing in the stock market?

Just like anything, investing in the stock market comes with risks. Investing could lead to financial loss for investors who cannot afford a sudden downturn in their portfolio.

The risks with the stock market depend on what type of investment people are making. A person can buy stocks, bonds, mutual funds, index funds, exchange-traded funds (ETFs) to invest in a company's future success.

Different investments have different risks. For example, buying individual stocks is very risky because there could be problems at one company, leading to its downfall.

It could significantly affect the investor's portfolio, whereas people who invest in mutual funds or ETFs diversify their risks across different companies.

Investing in the stock market can be an intelligent decision. Still, some risks come with it, and investors should weigh those risks against the potential rewards before making any investment decisions.

The risks of investing in the stock market depend on what type of investment you're looking to make and the research you've done on the company you are investing in.

How do you make money from stocks?

Buying stocks can be more profitable than other investments, such as bonds or real estate. If you invest in stocks of companies that grow quickly and make profits for their shareholders, your stock will also rise rapidly in value. That's because the price of the stock increases with the company's growth.

To make a profit on the stock, you've got to sell it for more than the price you bought it.

If things go well with your investment, not only will you earn some profit, but the company will also grow. This is the essence of shares. Companies allow us to buy shares as they are looking to further expand and the investor's incentive is the potential to make profits from the shares purchased.

Keep in mind that you do not officially make any profits or losses until you sell your stocks and there are taxes on the capital gains you make from profits if you did not buy those shares in a Tax-Free Savings Account (TFSA).

How to learn about investing in stocks?

When it comes to investing in stocks, you must know the investing process and how to start investing in stocks.

Above all, there are few things you must learn before you start investing in stocks.

You must know the basics about investing so that when you start, you understand what it is, how it works, and other information needed for successful investing.

Luckily, there are many great resources out there to help you learn the ropes. One of the most recommended books for this is Benjamin Graham's "The Intelligent Investor." It's a dense book, but it'll teach you everything you could want to know about investing in stocks successfully.

Investopedia is also a great resource as it covers nearly all you need to know!

As you learn about investing in stocks on the internet and reading books, start watching the market regularly and think about why things are happening the way they did.

On the other hand, if you'd like to invest your money without stressing about understanding the fundamentals of investing or doing much research, you can look into a Robo advisor or ETFs and index funds. This will all be done for you for a small fee, and you will make a decent return as they track the market.

How to start investing with little money?

Investing in stocks is a great way to make money, but it can be challenging for beginners, especially with little or no capital. 

The first part is all about your mindset.

When I started investing, I barely had any money and was also very scared.

At the time, I thought, "what's the point of investing my hard-earned cash if I don't really earn much anyway?". While this felt true as a broke college student, these thoughts were not only untrue; they were also severely damaging because they prevented me from investing in the stock market.  Instead, I spent my money on shoes and fast fashion that I don't wear anymore.

If you invest your money now - even small amounts ($5, $10, $50) will accumulate over time so all that matters is how often you are contributing to your investment portfolio! What really matters in the time you've been in the market.

The most important thing is for you to start. You may feel like you're contributing breadcrumbs but they will add up and you will reap the rewards years from now.

If you don't have a lot of money to invest, make sure to open a tax-advantaged account such as a Tax-Free Savings Account (TFSA) as your money will grow tax-free. Meaning you'll keep all of the profits you make! Max this out before opening a regular investment account.

With all this in mind, make sure you do your due diligence before investing in any company. Research is key to finding out the company's goals, how it compares to others in its industry, how well it is actually doing, and what specific problems they face. Finding out which investment will be best can only happen with research on each company you have your eye on. 

Proper research will also provide the conviction you'll need to hold on to your stocks during market downturns which are bound to happen. You'll need that conviction!

How do I start trading stocks?

To begin buying and selling stocks, start by opening a trading account. You can find an online brokerage such as Questrade or Wealthsimple Trade and open a stock brokerage account. I recommend opening a tax-free savings account and contributing to it until it is maxed out.

After you've opened an account, you'll need to fund it through your bank. Once your account is funded, you can begin buying and selling stocks on the various stock exchanges available in the chosen brokerage.

All that remains is for you to do research, consult an advisor for investment advice, and it's finally time to begin your stock investing journey!

The Takeaway

Investing in stocks is a great way to make money. But it's not without its risks! Stock market investments are risky and can potentially be very unprofitable. However, with proper research and strategic investment strategies, the risk may be mitigated and the rewards exponential. I hope this post has helped prepare you by providing a basic overview of stock markets so that you are confident in starting your stock market investing journey today.

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