1. How the Stock Market Works

2. Stock A share in ownership of a company. A share in ownership of a company. Someone who owns stock in a company owns a part of: Someone who owns stock in a company owns a part of: –the plant, –equipment, –raw materials, –finished products on hand plus, –any property owned by the company.

3. Here is an example of how stock comes into being. Jane Hughes owns a business making bicycles of her own design in her own shop. Bicyclists like her bicycles so much that they tell their friends about them. Soon there is a demand for more bicycles than Jane can supply. She would like to buy a bigger shop and expand her business. She has $5,000 in the bank, but that isn't enough to buy all the things she will need to set up a small factory to make bicycles. She decides to find some people who are willing to invest their money in her bicycle business. In exchange for investing their money, they will receive a share of the profits from the sale of the bicycles.

4. Jane Hughes finds nine people who believe her bicycle business can be profitable, and each agrees to invest $5,000. This means that there is $50,000 (including Hughes' $5,000) to build and equip a small factory. By investing in the bicycle plant, these 10 people, including Jane Hughes, have become owners of stock, or stockholders. A stock certificate is issued to each investor. It states that each is the owner of $5,000 worth of common stock in the Hughes Bicycle Company.

5. As stockholders, these 10 people have certain privileges. One is the right to see the company's records showing money received and spent. Another is the right to elect a board of directors responsible for deciding company policies. They elect a group of directors among themselves and name Jane Hughes president of the company. The stockholders also expect a share in the company's profits by receiving payments called dividends. The board of directors decides how much of the profits should be put back into the business and how much should be paid to the common stockholders in the form of dividends.

6. After a period of successful business activity, Jane Hughes learns that an opportunity arises to buy a company that manufactures skateboards. The board of directors of Hughes Bicycle Company wants to buy the…

7. skateboard company because they think it will give the Hughes Company another product to sell which will help the company grow. In order to raise enough money to buy the Skateboard Company, Hughes' directors decide to issue more stock; but instead of common stock, they issue preferred stock. They give the preferred stock to the owners of the Skateboard Company instead of cash in exchange for the plant, equipment and goods on hand.

8. As long as the business is doing well, stockholders with preferred stock receive a regular income in the form of dividends. Dividends will be paid to preferred stockholders before the board of directors approves any dividends for the common stockholders. The term "preferred" is used because preferred stockholders are shown preference in the payment of dividends. Unlike common stockholders, however, owners of the Hughes Company's preferred stock ordinarily do not have any voice in the management. They cannot vote for members of the board of directors who decide company policy.

9. Stocks may be purchased and sold in a variety of ways. For example, one of the original common stockholders of the Hughes Company may decide to sell his shares for cash. Since the Hughes Company is still fairly small and not widely known the shares are sold in the town where the company is located in what is called the over-the-counter market. The over-the-counter market is not a place. It is just a way of buying and selling stock in small companies by private bargaining instead of by public auction. The price of the shares sold in the over-the-counter market largely depend on how much buyers are willing to pay for the stock and how cheaply the owner is willing to sell. The buying and selling price at any given moment is often a compromise between the highest price a buyer is willing to pay and the lowest price for which the owner is willing to sell.

10. This is also one of the factors that influence the price of stock if it is sold by public auction or at a Stock Exchange. For example, if the Hughes Company continues to grow and issues more stock, in time it might ask to be listed on the Toronto Stock Exchange. By paying a yearly fee and meeting certain other requirements, the Hughes Company is entitled to have its stock bought and sold, or traded at the exchange. All trading is done through brokers who are…

11. members of the exchange and who function under rules intended to assure that trading will be fair, honest, and free from manipulation. The price at which stocks are bought and sold in this situation can be a compromise between the highest price a buyer is willing to pay and the lowest price for which the owner is willing to sell but, other factors such as supply and demand, the impact of current national or international events on a company and/or the popularity of items manufactured by a company are other factors that can influence the price. Price can also be affected if a company decides to split their stocks. For example, if the value of Hughes Bicycle Company stocks increases dramatically they may become too expensive for the average buyer. The company may then decide to split the stock meaning that the price of individual stock decreases. This enables a greater number of ‘average buyers’ to purchase the stock and potentially increases the number of stockholders.

12. The Toronto Stock Exchange is located in a building that serves as a marketplace for stocks and bonds on Bay Street in Toronto. The stocks of approximately 1,700 of the largest corporations in Canada are listed and traded there. In order to be listed, an industrial or oil and gas company must have at least one million shares of stock owned by at least 300 people, each of who own at least 100 shares. A share is one of the equal parts into which the stock of a corporation is divided. Each share of stock entitles its owner to a proportionate amount of the corporation annual profit in the form of a dividend. The company must publish financial statements showing the exact condition of the business every three months, and it must meet certain other rules set by the exchange.

13. Any person who is over 18 can buy stock. However, the actual buying and selling at one of the exchanges is done by a broker, who acts as an agent or representative for the people who want to buy and sell stocks. The broker carries out his customers' orders in exchange for a small percentage of the sale or purchase price, known as a commission. The size of the commission depends on the size of the sale.