The stock market is a place where anyone can buy and sell fractional ownership in publicly traded companies. It distributes the control of some of the world’s largest businesses among hundreds of millions of individual investors, and their buying and selling decisions ultimately determine the value of those companies. This dynamic process helps direct capital to where it is most needed, and it promotes overall economic efficiency.
Investors can buy or sell stocks through a broker, but most trading today takes place over the internet via exchanges (also known as “over-the-counter”). Think of a stock market as a big matchmaker: Each day it pairs sellers with interested buyers. Sellers can be companies looking to raise money through an initial public offering, or other shareholders who are ready to resell shares they have bought. Buyers can be individuals or institutions like pension funds, insurance companies, mutual funds, exchange-traded funds, and banks. Robo-advisors that automate investment for individuals are also major participants.
In general, the price of a share rises when demand from buyers exceeds supply from sellers. This can happen for a number of reasons, such as a company reporting better-than-expected profits, or an increasing perception that the economy here and abroad is improving. On the other hand, a company’s earnings may disappoint, or the economy can slide into recession, prompting some shareholders to sell.
Several factors can influence how well a stock is doing, including macroeconomic issues like interest rates and inflation, political events or natural disasters that could affect the global economy, or more specific things like negative media coverage of a company. Investors can track the performance of a group of stocks through indices like the TSX Composite or the Dow Jones Industrial Average, which serve as benchmarks for the Canadian and U.S. markets respectively.