What Is the Stock Market? How It Works, in Plain English

When I started investing, I barely had any money and I was scared of it.

I remember thinking, “what’s the point of investing my hard-earned cash if I don’t really earn much anyway?” So I didn’t. Instead I spent it on shoes and fast fashion I don’t even wear anymore.

If that sounds familiar, this one’s for you. Let’s start from zero.

What is the stock market, in simple terms?

The stock market is where people buy and sell small pieces of companies that are publicly traded, like Apple, Shopify or Tesla.

Those pieces are called shares. Buy one share and you own a tiny slice of that company: a slice of what it owns and a slice of what it earns. You’re betting that the company does well, so your slice becomes worth more.

You can make money from a share in two ways:

The price goes up. You sell it for more than you paid.
Dividends. Some companies pay part of their profits to shareholders, usually every quarter.

The buying and selling happens on exchanges like the Toronto Stock Exchange (TSX), the New York Stock Exchange (NYSE) and the NASDAQ.

Back in the day, that meant a trading floor: big rooms full of people yelling into phones in front of walls of screens. You’ve seen it in the movies. Today you do it from your couch, through an online broker like Questrade or Wealthsimple. You still need a broker, licensed to place the trade for you; the app just makes that invisible.

Say you want to buy Tesla. You open your broker, search the ticker, pick how many shares you want and the price you’re willing to pay, and place the order. That’s it.

Why do prices move?

Supply and demand. If more people want to buy a stock than sell it, the price goes up. If more want out, it goes down.

What makes people want in or out? Earnings reports, a new product, a scandal, interest rates, a pandemic, a viral post. Some of it is real information about the business and some of it is just mood. In the short term, the mood often wins. Over long stretches, the business usually does.

That’s the deal the stock market offers: you get to own part of businesses and share in their growth, without the risk and the 80-hour weeks of starting one yourself.

What are the risks?

Let’s be real: you can lose money. Prices can drop fast, and if you need that money right when the market is down, you’re forced to sell at a loss.

How much risk you take depends on what you buy:

One company’s stock is the riskiest. If that one company has a bad year, or a scandal, your whole bet goes with it.
Index funds and ETFs hold hundreds or thousands of companies at once. One bad company barely moves them. That’s diversification, and it’s the reason most beginners should start here.
Mutual funds also diversify, but many in Canada charge fees that quietly eat a big chunk of your returns over the years. Check the fee (the MER) before you buy anything.

Two rules I wish someone had given me early:

Only invest money you won’t need for a few years. Your emergency fund stays in a savings account.
Expect drops. They aren’t a sign you did something wrong. They’re the price of admission.

How you actually make money

You only make (or lose) money when you sell. Until then, it’s a number on a screen going up and down. That’s worth remembering on red days.

And when you do sell for a profit, you pay tax on the gain, unless the shares were in a Tax-Free Savings Account (TFSA). In a TFSA, the growth and the withdrawals are tax-free. In the US, the Roth IRA plays a similar role.

You don’t need a lot of money to start

This is the part I got wrong for years.

The first part is all mindset. When you only have $50 to spare, investing feels pointless. You may feel like you’re contributing breadcrumbs, but they will add up and you will reap the rewards years from now.

Here’s an example (not a promise). Say you invest $50 a month and it grows at 7% a year:

After 10 years, you’ve put in $6,000.
It’s worth about $8,650.

That extra $2,650 came from time, not effort. Stretch the same habit to 30 years and the growth ends up bigger than everything you put in. Returns aren’t guaranteed and some years will be negative, but the pattern is why what matters most is how long you’ve been in the market and how often you add to it.

Take this with a grain of salt: I’m not a financial advisor, and your situation is yours.

How to learn more

You don’t need to become an analyst. But you should understand what you own.

Books: The Intelligent Investor by Benjamin Graham is the classic, and it’s dense. The Simple Path to Wealth by JL Collins is the one I’d hand a beginner first.
Investopedia is a free dictionary for every term that confuses you.
Watch for a while. Follow the market for a few months and ask yourself why things moved the way they did.

And if you want to invest without picking anything at all, an all-in-one ETF or a robo-advisor does it for you for a small fee. For most people, that’s the best version anyway.

If you do want to buy individual companies, do your homework first: what the company does, how it compares to its competitors, how it’s actually doing, and what could go wrong. That research is also what gives you the conviction to hold on when the price drops, and it will drop.

How to start this week

Pay off high-interest debt first. Credit card interest is higher than anything the market reliably pays.
Open a TFSA with an online broker (Questrade, Wealthsimple, or your bank’s).
Fund it from your bank account, then set an automatic transfer on payday, even a small one.
Buy something boring and diversified, like a broad index ETF.
Leave it alone. Check it less than you think you should.

Investing is a get-rich-slowly thing, and slowly works.

So start with your breadcrumbs. That’s how bread gets made.