How Does the Stock Market Work?
The stock market isn’t a single entity, but rather a collection of exchanges where stocks (or shares) are traded. Business reports often refer to one particular exchange or index (like the TSX, the Dow Jones Industrial Average or the S&P 500) as a proxy for all of the market’s activity.
A share in a publicly-traded company represents a portion of ownership of that company. The prices of those shares rise and fall based on demand from buyers, who must negotiate with sellers to reach a price they’re willing to accept.
In the long-term, stock prices tend to be shaped by a company’s profitability. Consistent revenue growth attracts investors and drives up prices, while falling profit margins cause shares to drop.
Another big factor is the economy, which can have either a positive or negative impact on individual companies and their stocks. Low unemployment, for example, can buoy the market by indicating that Americans have more money to spend. But high inflation can erode purchasing power and hurt profits, driving down stocks.
The stock market is also affected by general economic trends, like interest rates, which influence whether people borrow to invest or save. For instance, lowering interest rates encourages spending and investing, while raising them discourages both.
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