What is Stock?

A share of stock represents a portion of ownership in a public company. This allows stockholders to own part a specific company. There are two main types: common stock and preferred stock. Common stock gives shareholders a voting right on company affairs while preferred stockholders cannot vote, yet technically “get paid” first because their stock holds priority when a company pays its stockholders.

(Stock is a part of a company—meaning owning a share of stock is technically “owning” part of said company. Common stockholders get to vote yet preferred stockholders get paid first)

Stock Markets

The stock market is essentially a large-scale organization of stock exchanges where public companies can sell stock. The price of a share of stock is determined by the supply and demand of a certain company (when a company is growing and doing very well the price of stock increases—cause the worth of the stock to increase as well!).

An initial public offering (IPO)  is a process where a private company presents shares of their stock through an exchange for the first time to traders and investors, which ultimately grows their business. This process turns a private company into a public company—meaning now that company’s stock is public on the stock market and can be bought, exchanged, and tracked publicly by investors. 

(The stock market is just a bunch of stock exchanges. The price/value of the stock is determined by the supply and demand of said stock.)

(When a company wants to start selling stock to the public they go through an IPO and exchange stock straight from their company to investors/traders in order to grow their business.)

There are two main types of markets, and both work differently.

Primary Market:

The primary market is where all stocks and values are created. This begins when a company goes through an IPO (becomes a publicly traded company) and joins the market. The stocks sold here come straight from the company during an IPO—meaning these are the first stocks sold from a newly public company.

(Basically IPOs = the primary market. The primary market is where og stock is sold straight from the company in question)

Secondary Market:

The secondary market is basically where all the exchanging happens—all the buying and selling of stock happens here—causing supply and demand of certain companies. This is the commonly thought of “the” stock market. The secondary market is where investors can buy and sell stock amongst each other.

(The secondary market is basically the stock market. It’s where stock is sold amongst traders and not straight from the companies.)

Secondary Markets Broken Down

• Auction Market:

The auction market is where everyone that wants to trade certain stocks/securities gather together and begin declaring prices, creating bids and asking prices. Depending on the demand for the stock, traders’ bids will continue to increase until no one raises the ask price and the stock is sold to the highest bidder. This allows traders to determine and publicly announce prices of different stocks. 

(Auction market is, as it says, an auction for stock. Highest bidder wins. A very big and well known auction market is the New York Stock Exchange)

• Dealer Markets:

Dealer markets can be joined electronically no matter location. In this market, the dealers keep a supply of different stock and provide an ask price for the public. Dealers sell stock directly from their own account. The dealers make money through the use of the bid-ask spread, which is the amount that the dealer’s declared price eclipses the normal price of a stock/security. This is how the dealers themselves make money when selling stocks. Dealers are also called “market makers.”

(A dealer market is run by dealers who sell stocks using a bid-ask spread which is basically the difference between the highest amount the buyers are willing to pay and the minimum price the dealer will sell at to make money. A good example of a dealer market is NASDAQ)

• Broker Markets:

Broker markets are marketplaces where brokers (surprising right) bring together buyers and sellers. The brokers, unlike the market makers of the dealer markets, don’t hold inventory of stock. They instead act as the middleman between buyers and sellers and make profit through a price spread (similar to the dealer’s price spread) or using a fee. Typically broker markets are considered the most effective at bringing all type of buyers and sellers together using a more skilled middleman. 

(Broker markets use brokers to sell different stocks to different buyers using either a price spread (just like the dealers) or a fee. These markets are good for beginning buyers who need someone with more mastery and experience in the stock market. A good example of a stock broker is E*Trade) 

Bull vs. Bear Market

The terms “Bull Market” and “Bear Market” are phrases used to describe the overall states/performance of stock markets.

Bull Market:

A bull market is when prices of stocks increase over a period of time—meaning stock value increases as well. A bull market can be caused by high employment rates,  a prosperous economy, high profits for companies, and most of all investor confidence. A bull market is marked by a 20% increase in stock prices and it is a time where investors want to keep their shares.

(A bull market is a 20% stock price increase for a prolonged period of time because of low unemployment and a booming economy. This is a time of high confidence for investors and they tend to hold on to stocks. An example of a bull market was the years right after World War II and right before the Great Depression)

Bear Markets:

Bear markets, as you could probably guess, are the opposite of bull markets. They are marked by a 20% decrease of stock prices and can be caused by declined company profits, high unemployment rates, a suffering economy, and especially low confidence from investors. During bear markets investors and traders desperately try to sell their stocks in order to receive reliable profits such as cash.

(A bear market is a 20% decrease in stock prices for a prolonged period of time. This is normally caused by a declining economy, high unemployment, low company profits, and low confidence from investors. At this time investors want to sell stock. The biggest example of this the Great Depression)

The mindsets of investors differ between a bull and bear market. In a bull market, investors are confident and optimistic, causing them to take higher risk investments. During a bear market, investors are worried and scared, causing them to sell stocks at very low prices and maybe miss the incoming rebound. 

Navigating the stock market can be hard—especially with the ever changing financial environment and political climate. But it is never a bad idea to start researching or talking to a financial advisor! The stock market may come off as intimidating, but hopefully after reading this it doesn’t seem as confusing. Investing can be as easy as investing in a company you like and leaving it to grow in value for a year. Sometimes seemingly small insignificant investments can become a very profitable venture! 

Thank you so much for reading, and as always these are my sources if you want more details:

https://www.td.com/ca/en/investing/direct-investing/articles/what-is-stock-market

https://www.fidelity.com/learning-center/trading-investing/preferred-stock

https://www.investopedia.com/investing/primary-and-secondary-markets

https://www.investopedia.com/terms/d/dealersmarket.asp

https://www.investopedia.com/terms/b/bid-askspread.asp

https://www.accountingtools.com/articles/brokered-market

https://www.citizensbank.com/learning/bull-market-vs-bear-market.aspx

https://www.fool.com/terms/b/bull-market