How The Stock Market Works

Think of a company as an entire pie; the pie is the ownership of a business. Each piece of the pie is a portion of the whole pie.

If the pie is divided into 100 pieces or stocks, then one piece or one stock is worth 1/100 of the pie or 1%.

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However, a company usually has 100s of thousands of stocks, or even a quarter of a million stocks.

Individuals have the ability – if they have the money – to buy these stocks and own a little piece of the company.

For really huge companies like Microsoft, Amazon, Apple, Google, and some oil companies, etc., the company could have millions of shares owned by individuals.

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Selling stocks is one way a company can raise money and not have to take out loans to expand their business.

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Exchanges

When a company wants to raise money for special projects, the company is listed on an exchange, such as the New York Stock Exchange (NASDAQ), the Toronto Stock Exchange (TSX), and others in Japan, Singapore, Britain, Australia, India, etc.

The price of the stock will increase and decrease according to the demand. Today, trading stock occurs electronically through the internet.

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How to Purchase Stocks

Purchasing stocks is called investing. Most individuals use a stock broker to buy and sell stocks. A bank will have a division that deals with investing.

This is usually the cheapest way to trade in stocks and the fees (commissions) are quite low.

Other stock brokers charge a larger commission every time you buy a stock and every time you sell it.

First, you have to open an account with the brokerage house or bank and then make a deposit of cash into the account. 

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Buyer Beware! Choose Your Broker Carefully

Some brokers will make suggestions as to what stocks they think will go up in price. This is what investors want, of course, but there is no guarantee.

Just as often, stock prices fall, in which case, you would lose money. Getting into the business of investing is a risky business.

Unless you know a lot about buying and selling stocks, you really are depending on someone else to give you good information so that you can make a profit on your investment.

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There are good brokers and there are just as many poor ones. Either way, they make their money by how many trades you make.

Regulators

There are agencies appointed to control illegal aspects of trading, such as insider trading, unlicensed brokers, and fraudulent investment schemes.

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Individuals and brokerages can face fines and/or jail if found guilty of scamming investors.

Quiz Time – Test Your Stock Market Knowledge!

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Questions

What are stocks?

Why does a company issue shares to be sold to the public?

What is an exchange? Give 2 examples.

What does a stock broker do?

Why is investing a risky business?

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Answers

Stocks are pieces of a business that a person can own if they invest a certain amount of money per stock.

A company will issue stocks for sale in order to raise money for a project and not have to apply for a bank loan.

An exchange is a listing of many companies who are offering stocks for sale. The NASDAQ and the TSX are two exchanges.

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A stock broker opens an account for an individual to deposit money to be used to buy and sell stocks.

An ordinary person has to depend on their stock broker’s expertise and knowledge in order to make profitable stock purchases; not all stock brokers have that ability.

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