Understanding stock markets 101


Understanding stock markets 101

What is the stock market?

The stock market is a medium for stock transactions between buyers and sellers. It is made up of a primary and secondary market. The primary market presents the initial public offering (IPO) where companies first release new shares to the public, and transactions are directly between buyers and the company itself. The subsequent trading of these pre-issued stocks occurs in the secondary market among investors. References to the stock market are often pointed specifically to the activity of the secondary market.

What purpose does the stock market serve?

Buyers and sellers alike participate in stock markets to increase their earnings. Companies use stock markets to raise capital by selling shares of their business to investors. Similarly, investors use the stock market to buy into a portion of a company’s expected future profits.

How do I access the stock market?

Stock market trading is accessible through an exchange or over-the-counter market. Both act as a meeting space for the market itself and are used to facilitate trade executions. When you prepare to enter the stock market, consider which method of execution best coordinates with your needs and interests.

Exchanges

A stock exchange facilitates stock transactions using a highly organized electronic or open-outcry system. Electronic exchanges use networked computers to organize incoming and outgoing trades. Potential buyers and sellers submit their bids and asks, and the electronic exchange then matches them and executes the trade. An open outcry exchange, on the other hand, uses a physical trading floor where traders gather, coordinate, and carry out trades in person. In the open outcry system, traders submit verbal bids and asks.

An exchange offers several advantages. It supplies increased liquidity as spreads are commonly small. It also provides a transparent and secure trading environment because prices are publicly listed, so all buyers and sellers are met with the same pricing figures. In addition, an exchange acts as a clearinghouse. It mitigates risk by ensuring both ends of the transaction are carried out as agreed upon.

Over-the-counter (OTC) market

The OTC market, also referred to as an off-exchange market, has no formal location, electronic or otherwise, and is less regulated than an exchange. Transactions are arranged informally using multiple means of communication. OTC bid and ask prices are published daily in a document referred to as pink sheets, which is why OTC stocks are also called pink sheet securities. However, because these stocks are unlisted and trade interaction is conducted through various means, prices may not be publicized and may actually differ between executions.

How do I decide which stock exchange to trade on?

There are many North American stock exchange options available to you, and it may not be immediately clear why you should pick one over another. Your interests, however, may help dictate which exchange you use.

Different exchanges list companies that are in different stages of development. Major exchanges will likely list more established companies than minor exchanges, which may cater more to emerging organizations.

Major North American exchanges

Toronto Stock Exchange (TSX)

The TSX is the largest stock exchange in Canada and the third-largest in North America, as measured by market capitalization or market cap (total value of a company’s outstanding shares). TSX is an electronic exchange headquartered in Toronto. It is a senior equity market, listing many of Canada’s largest publicly traded companies. In particular, it lists the highest number of mining and oil and gas sector organizations than any other exchange.

To trade via the Toronto Stock Exchange, enter .TO after the corporate symbol.

TSX Venture Exchange (TSX Venture)

TSX Venture, formally known as the Canadian Venture Exchange, was purchased by the Toronto Stock Exchange. TSX Venture is an electronic exchange, and its main office is in Calgary. Its listings are predominantly of small emerging companies that are likely unable to meet the more demanding listing requirements of the TSX.

To trade via TSX Venture, enter .VN after the corporate symbol online.

Canadian National Stock Exchange (CNSX)

The CNSX is located in Toronto and identifies itself as an alternative electronic trading system. Its listing requirements are made more attainable to small market cap and emerging companies. Refer to the CNSX website for quotes.

To trade via the CNSX, you will need to directly contact your broker.

New York Stock Exchange (NYSE)

The NYSE, often also referred to as the Big Board, is the world’s largest stock exchange. The NYSE is located in New York and, unlike the other exchanges discussed, uses both a trading floor and an electronic system. Companies listed on the NYSE are awarded great credibility because they are subject to very strict requirements and annual maintenance obligations.

To trade via the NYSE, either contact your broker directly or enter the corporate symbol online. No additional extension is required.

National Association of Securities Dealers Automated Quotations (NASDAQ)

Also located in New York City, NASDAQ is the world’s second largest exchange. Though it is second to the NYSE in market cap, NASDAQ’s listings and number of traded shares is greater than that of NYSE’s. However, its listing requirements are also not as demanding. Nevertheless, NASDAQ leads other exchanges in listings of technology sector organizations.

To trade via NASDAQ, enter the corporate symbol online. No additional extension is required.

Over-the-counter bulletin board (OTCBB)

The OTCBB is an electronic service for executing OTC stock trades. It lists small cap and thinly-traded stocks that are regarded as high-risk. Companies using OTC markets are typically smaller, less liquid organizations that are unable to fulfill the more stringent listing requirements of an exchange. OTC markets and exchanges generally will not dual-list stocks.

To trade via the OTCBB, select limit as the order type and enter the corporate symbol online. No additional extension is required.

Extended hours trading

Extended hours trading occurs before or after traditional trading hours, which have historically been set from 9:30 a.m. to 4 p.m. ET. This accommodation extends the trader’s window of opportunity for responding to world events and news in their trading activity.

Each of the aforementioned North American exchanges adheres to the traditional trading hours. However, the NYSE and NASDAQ also offer extended hours trading from 8 a.m. to 9:30 a.m. ET and from 4 p.m. to 5 p.m. ET. The Toronto Stock Exchange offers after hours trading from 4:15 p.m. to 5 p.m. ET.

Is it possible to predict stock market movements?

This question may not have a hard and fast answer, but there are many  who  believe certain methods of analysis can be used to help predict stock market activity. The two main approaches to stock market analysis are technical and fundamental analysis.

Technical analysis

Technical analysis studies the market itself using quantitative techniques and charts. This method of evaluation searches for patterns in market activity and attempts to use these observations to gauge future pricing.

Fundamental analysis

Fundamental analysis, on the other hand, studies a particular company and its context in the current economy. It looks at a company’s financial statements, growth, business trends, and capabilities to determine its market behaviour. This method also considers how the health of the economy will impact the company’s stock.