If you've ever wondered how the stock market actually works, you're in good company. It can seem complicated at first, but the basics are easier to understand when you break them into steps. In this guide, we'll cover everything from what the stock market is and how stocks work, to how prices are set and how you can start investing. Consider this your plain-language primer on how the whole system operates — especially for Canadians.
What is the stock market in Canada?
The stock market in Canada is where investors buy and sell shares of publicly traded companies. Most trading happens through the Toronto Stock Exchange (TSX) and the TSX Venture Exchange (TSXV), with smaller exchanges like the Canadian Securities Exchange (CSE) and Cboe Canada rounding out the local landscape. Canadians also commonly trade on major US exchanges like the New York Stock Exchange (NYSE) and Nasdaq. Together, they form a network of marketplaces for trading pieces of ownership in businesses.
The TSX is home to large, established companies, while the TSXV caters to smaller, emerging businesses looking to grow. South of the border, the NYSE and Nasdaq list some of the world's biggest companies — think Apple, Microsoft, and Berkshire Hathaway. Together, these exchanges form the backbone of the North American capital markets that Canadians can tap into.
The stock market serves two important purposes. First, it lets companies raise capital by selling shares to investors — money they can use to expand, hire, or develop new products. Second, it gives everyday people a chance to own a piece of those companies and potentially grow their wealth over time.
How do stocks work?
What's the one thing a stock market needs to operate? Why stocks, of course! Before we explain how the stock market operates, let's define a few key terms.
What the heck is a stock? A stock represents a share in a company's ownership, and those who own stocks can claim a percentage of the company's assets and earnings. Exactly what percentage depends on how many shares you own relative to how many currently exist — or in finance speak, the "outstanding."
With some simple division, we learn that a stockholder who owns 100 shares of a company with 5 million outstanding shares owns .00002 of the company. (That's a very small ownership stake.)
A company will issue stock in order to raise money for various business-y reasons — the most prevalent of them being expansion that the company wouldn't otherwise have the cash to undertake. When the company first issues shares, they often do so through what's called an initial public offering (IPO). Since it's the first time they're sold, this is called a stock's "primary market."
Once the shares have been sold that first time, stockholders will need a place to resell them, kind of like a used-car lot for stocks. This is called the stocks' "secondary market," but it's more familiarly referred to as just "the stock market."
What is a stock exchange?
A stock exchange is the actual marketplace where buyers and sellers connect to trade shares. It's a highly regulated digital venue — think of it like a farmers' market, but instead of produce, people are trading pieces of companies, and there are a lot more rules.
When you place an order through a brokerage, it gets routed to an exchange to find a matching buyer or seller.
The vast majority of all stocks are listed on one stock exchange, and there are 60 major stock exchanges globally. The top 16 are often called "The $1 Trillion Club" since the market capitalization of their component stocks tops $1 trillion.
The stocks traded on the $1 Trillion Club represent 87% of all global market capitalization. The New York Stock Exchange (NYSE) is one of the world's largest exchanges by market value.
Name | Location | Market Capitalisation (USD) |
|---|---|---|
| New York Stock Exchange (NYSE) | USA | 25.53 trillion |
| NASDAQ | USA | 11.23 trillion |
| Tokyo Stock Exchange (TSE), also known as Japan Exchange Group | Japan | 5.1 trillion |
| Shanghai Stock Exchange (SSE) | China | 4.67 trillion |
| Hong Kong Stock Exchange (SEHK) | China | 4.23 trillion |
| Euronext | Netherlands | 3.67 trillion |
| Shenzhen Stock Exchange (SZSE) | China | 3.28 trillion |
| London Stock Exchange (LSE) | UK | 3.2 trillion |
| TMX Group, includes the Toronto Stock Exchange (TSX) and the Montreal Stock Exchange | Canada | 1.75 trillion |
| Bombay Stock Exchange (BSE) | India | 1.51 trillion |
Even though a stock is listed on one exchange, it could be available for purchase on other exchanges. Depositary receipts are certificates issued by banks that let investors trade foreign shares on local exchanges.
How does the stock market work?
The core idea is unchanged—buyers and sellers trade shares—but the mechanics are now largely electronic compared with decades ago. Since computer automation now represents the vast majority of trading activity, markets like the NYSE, which was once a busy trading floor with brokers placing orders in person, are now relatively sedate. Most trading is now electronic, and many exchanges have reduced or eliminated open-outcry trading floors. Some physical trading floors have closed or downsized, even as the exchanges continue to operate electronically.
Most people access the stock market through licensed brokers (often online brokerages). Orders are routed to an exchange, where they're matched with a buyer or seller.
In Canada, when you buy or sell a stock, your trade settles on a trade date plus one business day (T+1) basis—meaning the transaction is officially completed one business day after you place the order.
How is the price of a stock determined?
Like any other free market, the stock market works according to the laws of supply and demand. Supply refers to how much of something is available, and demand is how much of it consumers want to buy. Excess demand will drive prices up, and excess supply will push prices down.
Two parties are required for a stock market sale: a buyer and a seller. Here's how pricing works in practice:
Bid-ask spread: sellers decide the lowest price they'll accept, buyers decide the highest they'll pay, and the difference between these numbers is the bid-ask spread.
Liquidity: the closer the bid-ask spread is to zero, the more easily the stock trades.
Share volume: how much a stock is traded on a particular day.
Investors may determine the price of a stock based on a number of factors, which include:
Revenue growth.
Historical price trends.
Earnings per share (EPS)
Dividend payments
Key stock market terms
When you start following the markets, you'll hear certain terms thrown around constantly. Here's a quick glossary to help you decode the jargon:
Index: a benchmark that tracks the performance of a specific group of stocks. In Canada, the S&P/TSX Composite Index is the main one to know — it measures the performance of the largest companies on the TSX.
Market capitalization: the total dollar value of all a company's outstanding shares. It's calculated by multiplying the share price by the number of shares.
Dividend: a portion of a company's profit paid out to shareholders, usually on a quarterly basis. Not all companies pay dividends — many reinvest profits back into the business instead.
Liquidity: how easily a stock can be bought or sold without significantly affecting its price. Stocks with high trading volume tend to be more liquid.
Volatility: how much and how quickly a stock's price moves up and down. High volatility means bigger swings.
Bull market: a period when stock prices are generally rising and investor confidence is high.
Bear market: a period when stock prices are generally falling, typically defined as a decline of 20% or more from recent highs.
Advantages and risks of investing in stocks
Investing in stocks offers the potential for long-term growth, which can help your money outpace inflation. Over time, the stock market has historically trended upward, rewarding patient investors. A compound return calculator can show how even modest returns add up significantly over decades, thanks to the power of compound interest.
Another advantage is the potential to earn passive income through dividends — regular payments some companies make to shareholders. And unlike stashing cash under your mattress, investing gives your money a chance to work for you.
However, investing in stocks comes with risks. Stock prices can fluctuate based on company performance, economic conditions, or global events. You could lose money if a company struggles or if you sell during a market downturn.
There's a concept called the "equity risk premium" — the extra return investors expect for taking on stock market risk versus parking money in safe government bonds. Over the long term, this premium is what makes stocks worth considering despite their volatility.
Diversification — spreading your money across many different investments — is a standard way to manage risk. Nobel Prize-winning economist Harry Markowitz championed this through Modern Portfolio Theory: instead of betting big on one or two stocks, buy smaller holdings in dozens (or hundreds) of companies. This strategy helps you capture market growth while protecting yourself from catastrophic losses in any single stock or sector.
How do I invest in the stock market?
You have a number of choices when it comes to investing in the stock market:
Online brokerage: for self-directed investors who want to choose their own investments.
Financial advisor: for investors who want personalised guidance and ongoing financial planning.
Robo-advisor: for investors who want an automated, diversified portfolio, typically with lower fees.
Online brokerage
One of the most accessible ways to buy stocks is through an online discount brokerage. Accounts can be opened in 10 minutes if you have a social insurance number, a home address, and an employer's address. (If you're self-employed, you can usually use your home address where an employer address is requested.)
Discount brokerages normally charge a fee for each stock, mutual fund, or exchange-traded fund (ETF) you trade. Most will assess a flat per-trade commission fee for any stock purchase, big or small, that generally ranges from $5–$10 per online trade. Increasingly, a few investment providers have started offering commission-free trading, so every cent you pay goes directly into your stock investment.
Financial advisor
If you have a financial advisor, you may choose to execute trades through them. Some advisors are "fee-only," meaning they'll either charge you a flat fee or take a small percentage of the value of your portfolio every year.
If you don't have a financial advisor, it might not be practical to hire one specifically to make a single trade. advisors generally specialise in creating financial plans that help with the bigger picture. They are particularly useful for people with a high net worth or complicated tax situation.
Robo-advisor
Automated investing services typically build a diversified portfolio of ETFs based on your goals rather than individual stocks. The advantages of robo-advisors come in the form of low fees and a diversified portfolio that's likely made up of a bunch of different stocks, bonds, and real estate.
Robo-advisors often aim to track a market benchmark rather than outperform it. Signing up is usually straightforward: the process is online, and you can start investing within minutes once your account is funded.
Next steps before buying your first stock
Before diving in, it’s important to have a clear plan. Start by defining your financial goals and your time horizon. Money you might need in the next few years is generally more appropriate for shorter term investments such as bonds or GICs or even a high-interest chequing or savings account, while funds for long-term goals like retirement can be invested.
Consider your risk tolerance and decide whether you want to pick individual stocks or use a diversified approach like ETFs. Finally, choose an investment account type that suits your needs, such as a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP). Both offer tax advantages that can help your investments grow more efficiently over time.
And remember: investing is a long game that comes with risk. The goal isn't to get rich overnight — it's to steadily build wealth over years and decades.
