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How stocks trade

Most stocks are traded on exchanges, which are places where buyers and sellers meet and decide on a price.

The stock market is a public market intended to facilitate the exchange of securities between buyers and sellers. Just imagine how difficult it would be to sell shares if you had to call around the neighbourhood trying to find a buyer.

Two types of market

The primary market is where companies issue securities for the first time. This is called an Initial Public Offering (IPO).

The secondary market is what people are referring to when they talk about the stock market. This is where investors trade previously-issued securities without the involvement of the issuing-companies.

Two types of exchange

Some exchanges are physical locations where transactions are carried out on a trading floor. You've probably seen pictures of a trading floor, in which traders are wildly throwing their arms up, waving, yelling, and signalling to each other.

Prices are determined using an auction method: the current price is the highest amount any buyer is willing to pay and the lowest price at which someone is willing to sell.

The other type of exchange is virtual or electronic and is composed of a network of computers where trades are made electronically. Stocks aren't sold by auction. In a virtual market, prices are based on bid and ask prices, which are fixed by brokers, who act as "market makers". A market maker provides bid and ask prices within a prescribed percentage spread for shares for which they're designated to make a market.

They may match up buyers and sellers directly, but usually they maintain an inventory of shares to meet investor demands.

The New York Stock Exchange

The most prestigious and largest exchange in the world is the New York Stock Exchange (NYSE). Founded in 1792, the NYSE is the market of choice for the largest companies in America, such as General Electric, McDonald's, Citigroup, Coca-Cola, Gillette, and Wal-mart.

The NYSE is one of the few exchanges where much of the trading is done face-to-face on a trading floor. But don't think that the NYSE is still in the stone age; computers do play a huge role in the process.


The NASDAQ (National Association of Securities Dealers Automated Quotations), founded in 1971, is the largest electronic financial market in the world. It is the second-largest exchange in the United States.

It used to be that the largest companies were listed only on the NYSE while all other "second tier" stocks traded on the other exchanges. The tech boom of the late '90s changed all this; now the NASDAQ is home to several big technology companies such as Microsoft, Cisco, Intel, Dell, and Oracle. Large corporations from other industries such as banking, biotech and transport are also present. This has resulted in the NASDAQ becoming a serious competitor to the NYSE.


The third largest exchange in the U.S. is the American Stock Exchange (AMEX). The AMEX used to be an alternative to the NYSE, but that role has since been filled by the NASDAQ.

In fact, the National Association of Securities Dealers (NASD), which is the parent of NASDAQ, bought the AMEX in 1998. Almost all trading now on the AMEX is in small-cap stocks and derivatives.

Small-cap (capitalization) stocks are stocks in small companies in new or emerging sectors. These companies present a higher risk of failure, but a higher yield potential if they are successful.

Derivatives enable transactions to be carried out considering the value of an "underlying" asset, which can be an index, a currency or a commodity. This way, without buying, you can profit from changes in the price of coffee or oil during a certain period: if the price of coffee goes up, you make a profit; if it goes down, you lose money. A derivative can generate a profit with a small investment, but betting on an index or currency is risky.

Canadian exchanges

Founded in 1861, the Toronto Stock Exchange (TMX) is the largest in Canada and one of the 10 largest in the world in terms of capitalization.

Officially founded in 1874, the Montréal Exchange is a virtual exchange focused on derivatives.

Other exchanges

There are many stock exchanges located in just about every country around the world. Even if the American markets are the largest, they still represent only a fraction of total investment around the globe.

The two other main financial hubs are the London Stock Exchange and the Hong Kong Stock Exchange.

Another type of market that exists is the over-the-counter market, where you can trade in securities that aren't listed on any known market. The over-the-counter market has very little regulation compared with official stock markets. This makes investing in an over-the-counter stock very risky. Stock value is quoted in cents, because they're often worth less than $1. The OTCBB (Over-the-counter Bulletin Board) is an example of an over-the-counter market. Over-the-counter markets are electronic markets.

Tools and tips

Stock basics

Learn more about the fundamental principles of stocks.

Read tip - Stock basics

What causes stock prices to change

Many factors cause stock prices to change.

Read tip - What causes stock prices to change

Understanding stock quotes

How to read a stock table

Read tip - How to read a stock table

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