How do stocks and investing work?

How do stocks and investing work: The stock market is a market where supply and demand for financial instruments meet. This file helps you understand how it works and explains what stocks and bonds are that can be bought or sold there.

What is the stock market?

Companies can finance their development, in particular,  by issuing financial securities, that is to say, shares or bonds.

The Stock Exchange is a market: investors can buy and resell their securities there. When stocks and bonds are listed on the stock exchange, their value rises and falls based on supply and demand.

Investors expect the value of their securities to rise.

For savers, the stock market is an investment. Savers can buy shares and bonds either directly or through collective investments (funds), which themselves invest in shares and bonds.

What is an action?

A share is a financial security that represents a share of the capital of the company that issued it. When you become a shareholder, you become the owner of the company up to the number of shares that you have acquired.

Becoming a shareholder gives two main rights. The first is that of voting at general meetings in proportion to the number of shares available. The second right is that of receiving, each year, a share of the profits distributed by the company: This is called dividends.

Attention dividends can only be distributed when the company makes a profit, if it loses money, there will be no dividend.

To buy and sell shares, it is necessary to have a securities account or a PEA with a bank, a brokerage firm, or a broker.

What is a bond?

A bond is a part of a loan issued by a company, a public institution, or by the State. By investing in bonds, the investor becomes, in fact, a lender and therefore a creditor of the issuing structure in exchange for which he will receive regular interest called a " coupon ".

Like any investment, bonds can involve risks for the investor. The first is that the issuer cannot meet its commitments (default risk). In this case, it is possible to lose all of the sums invested.

If the investor wishes to part with his bonds before their maturity, he may not recover all of his investment. Indeed, before its maturity date, the value of a fixed-rate bond (the majority of bonds) falls in the opposite direction to interest rates: if rates rise, the value of the bonds falls.

How to Invest in Stocks in Canada

Thanks to a strategic approach in terms of investment, novice investors can build portfolios that will allow them to access certain financial freedom. The economic impact of the COVID-19 pandemic has made many Canadians realize that they are ill-prepared for emergencies. While maintaining a savings account is helpful, interest rates, even for high-interest savings accounts, are often below 1.5%. According to Morningstar, the long-term average annual rate of return of the S&P/TSX Composite Index (TSX) was 9.3% (pa) between 1960 and 2020. By allocating part of your savings to investments, you will obtain a much higher rate of return.

Aspiring stock market investor's guide 

1. Set investment goals and choose the right investment model
2. Open an investment/brokerage account online
3. Choose an investment strategy
4. Find stocks and ETFs to invest in
5. Perform stock transactions
6. Monitor and optimize your portfolio.

 

Investment objectives and investment model In general, people choose their investment goals based on a few factors: age, income, and expectations or lifestyle. Do you intend to buy a house in the next few years? Do you want to help secure a better financial future for your growing family? In case of an emergency, how much would you like to have set aside? If you are investing for your retirement, how often do you plan to play golf? These are just a few of the questions that can help you set investment goals.

Investment model

There are several approaches to investment strategy, and they vary by market. There are different types of fund strategies depending on portfolio allocation and risk tolerance. Risk tolerance is generally grouped into three categories: conservative, moderate or aggressive.

Open an investment or brokerage account online

If you're the do-it-yourself type and want to be in charge of your finances, opening an online brokerage account is for you. An online brokerage account allows you to choose your stocks and ETFs without the need for a financial advisor. Many online brokerage services will allow you to trade with little or no commission fees. All major Canadian banks offer brokerage services for self-directed investors, allowing you to manage your investments through your usual financial institution.

Investment strategy

Having a solid investment strategy will put you on the path to success. If you want a passive investment strategy, index investing is the best option. Index investing techniques involve buying an ETF or index mutual fund that tracks a stock market index like the TSX Composite or S&P 500. You can quickly build a diversified portfolio with one to five ETFs representing national, U.S. stock markets and international bonds, as well as government bonds. 

Your portfolio follows the market, so index investing takes less time and leaves less room for error. The downside is that the returns may not be as substantial as they would be with other strategies. Furthermore,

Exchange-Traded Funds (ETFs)

ETFs are investment funds that allow you to invest in a group of individual bonds and stocks in a single purchase. You can track a specific index, like the TSX, commodities, bonds, or a range of different assets in a single fund. ETFs trade like stocks, with price fluctuations as they are traded in the market. Investors benefit from the interest in ETFs' pool of assets and can maintain a diversified portfolio without having to invest in the stocks of a particular company.

Invest in dividends

Dividends are among the most common investments because they provide investors with a steady stream of income. Dividend stocks generally perform well over the long term.

When looking for stocks and companies that pay dividends, you want to make sure there will be long-term profitability. Look for companies that grow steadily, are well-financed, and have experienced management teams. Investors should look to companies that show promise of growth and provide corporate presentations that demonstrate this.

Some good resources for tracking stocks are Yahoo! Finance, Marketwatch, and Bloomberg. You will want to familiarize yourself with investment terms, especially in the precious metals sector. 

Start trading online

Each online bank or broker has a unique interface, but the basic methods are relatively similar. You can also buy shares directly from companies through purchase plans. If you choose this route, we suggest that you contact the Investor Relations team, who will guide you through this process.

Before making your first trade, you should consider the following:

Stock value

The value of the stock is the price displayed through your online broker on a market website or the price when it last traded. Highly traded stocks fluctuate often, but not much. Stocks that are traded less frequently see their price fluctuate more. Remember that the price you pay or receive for a stock is not always the same as what is displayed – the bid and ask prices determine it.

Offer price

The bid price is the amount buyers are willing to pay or “bid” for the stock. You will receive the bid amount when you sell shares in market orders. If the bid price is too low, you can place a limit order for a higher price, where you will wait to see if the price reaches the desired amount.

Asking price

The ask price, or ask price, is the amount a seller asks for a stock. You pay this amount when you buy shares against a market order. Just like auctions, you can place limited orders to wait and buy at the specified amount.

Watch your portfolio

If you're an active investor, you need to stay on top of market trends and their impact on your portfolio. Depending on the market, you may need to buy or sell. Things like the performance of your investment in the last quarter can prompt you to sell or buy more. If you are a passive investor who favors the long term, you can buy and sell on a fixed schedule. Either way, investors, whether novice or experienced, need to make data-driven decisions to maintain the strength of their portfolios.

Just like cycling, investing gets easier with time and practice. There's a lot to learn, and there are plenty of resources to help you develop skills and knowledge to apply to your investing strategy. And the next time someone asks you "what is a stock", you'll be better prepared to answer them!