The stock market is a rather elusive aspect of modern society to the vast majority. Its existence is known, but few understand it, and even fewer partake in it. Understandably so.
The market can seem intimidating for many reasons. Appearances being one of them. Afterall, on the outside, the stock exchange is a terrifying hoard of everchanging red and green numbers sitting alongside cryptic 3-letter acronyms. Then there’s the fact that the global stock market itself is huge, as demonstrated by its valuation, which, according to Bloomberg, was at $95 trillion in November 2020.
However, its size is exactly why it is so crucial to understand how stocks work, since they have a tremendous impact on economies all around the world.
So, what exactly is a stock? A stock is essentially a share of a company. They can be bought and sold, just like regular goods. When a person buys a stock, they become partial owners of the company. Though they hold no executive power, they still receive a portion of the company’s profits, and may even be paid dividends (regular payments companies make to shareholders, though not all stocks pay dividends).
The stock exchange is where the buying and selling of stocks occurs. There are 60 major stock exchanges around the world, with the Toronto Stock Exchange (TSX), being one of them. Shareholders’ can buy and sell shares however they see fit, however the prices at which they can do all this is determined by the value of the stock at the time of the transaction. The value of a stock can fluctuate multiple times throughout the day since this value is dependent on multiple outside factors. New regulations, changes in production methods, changes in price for supplies, and even changes in public perception of the stocks’ value can influence the price of a stock.
All of this means that when buying stocks, most prospective buyers spend a lot of time researching the company, its future initiatives, and its current price on the market. The same can be said for prospective sellers as well. But what exactly is the point of all this research? It’s to ensure that the stock will be profitable. Buyers tend to look for stocks projected to go up in value, so that they can buy them for a relatively low price and then sell them for a higher value. Sellers try to isolate when the stock will be at its highest value, and will sell it at that point.
Despite its intimidating interface, the stock market isn’t as complex or convoluted as many assume it is. Understanding it and its various functions is extremely important, since without fully comprehending the stock market, understanding the larger economy becomes difficult.