How Do Stocks Function?

 

When you buy a stock, you are buying a small ownership stake in a real company. That company could be a bank, a technology firm, a retailer, or any business that has chosen to raise money by selling shares to the public.

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Stocks are often associated with higher long term growth compared to cash or bonds. That growth potential comes with risk, which is why understanding how stocks work matters before investing your money.

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How Canadians Buy Stocks?

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To buy stocks in Canada, you need a brokerage account. This is done by opening a self directed account with an online brokerage.

Inside your brokerage, you can hold stocks in different types of accounts:

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A Tax Free Savings Account (TFSA)  allows your investment growth and withdrawals to be tax free.

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A Registered Retirement Savings Plan (RRSP)  allows your contributions to reduce your taxable income, while investments grow tax deferred.

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A non registered account is a taxable account that can be used once registered accounts are maxed out or for shorter term goals.

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Choosing the right account often matters just as much as choosing the right stock. This is something many Canadians overlook early on.

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Instead of buying individual stocks, you can also invest through exchange traded funds or mutual funds. These investments hold many stocks at once, which helps reduce risk and limits the need to analyze individual companies.

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If you are new to investing, this is often a simpler and more forgiving starting point.​​​

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What Happens When You Own a Stock?

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As a shareholder, your financial outcome is tied to how the company performs over time.

If the business grows, earns more money, and becomes more valuable, its stock price generally rises. If the company struggles, loses money, or faces uncertainty, the stock price can fall.

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Your gain or loss only becomes real when you sell the stock. Until then, price changes are simply fluctuations on paper.

Some companies also share part of their profits with investors through dividends. These are cash payments made to shareholders, usually on a regular schedule. Dividends can provide income while you continue to hold the stock, especially for long term investors.

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Types of Stocks You Can Buy

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There are two main types of stocks available to investors.

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Common stock is what most people buy. It gives you voting rights and the potential to benefit from rising share prices and dividends.

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Preferred stock usually does not come with voting rights, but it often pays a fixed dividend. Preferred shareholders are paid before common shareholders if dividends are distributed.

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Most individual investors focus on common stocks, especially when investing for long term growth.

 

Pros and Cons of Buying Stocks

 

Pros:

• Stocks generally offer stronger potential returns over time compared to cash and bonds.

• They provide the opportunity to earn dividends and capital gains, especially when held in registered accounts.

 

Cons:

• Investing in stocks requires significant research and due diligence.

• The market’s volatility means that you need to be prepared for fluctuations, especially in the short term.

• If the company goes bankrupt, there’s a risk of losing your entire investment.

 

Making Money from Stocks

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There are two primary ways investors make money from stocks.

The first is capital appreciation. This happens when you buy a stock at one price and sell it later at a higher price.

 

For example, if you buy 100 shares at six dollars each, your total investment is six hundred dollars. If the stock rises to ten dollars per share and you sell, you receive one thousand dollars. After subtracting your original investment, your gain is four hundred dollars.

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The second way to earn money is through dividends. Some investors focus on holding stocks that pay regular dividends and reinvest those payments over time.

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While buying low and selling high sounds simple, stock prices are influenced by many factors, including company performance, interest rates, and investor sentiment. This is why consistently timing the market is extremely difficult.

 

Time Frame and Stock Investment

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Your investment time frame plays a major role in whether stocks are appropriate for you.

If you need your money in the short term, stocks may not be the right choice. Market downturns can happen without warning, and selling during a decline can lock in losses.

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If your time horizon is long term, market volatility becomes less threatening. Historically, markets have recovered from every major downturn given enough time.

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Since the Toronto Stock Exchange was established in 1861, it has experienced wars, recessions, financial crises, and periods of rapid growth. Investors who stayed patient and invested consistently were rewarded over time.

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The goal with stocks is not to avoid volatility. It is to use time, discipline, and consistency to your advantage.

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How to Open an Investment Account 

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Step 1: Open a Brokerage Account

To buy and sell stocks, you need to open a brokerage account — this is your gateway to the stock market.

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In Canada:

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• Questrade

• Wealthsimple Trade

• TD Direct Investing

• RBC Direct Investing

 

In the U.S.:

• Fidelity

• Robinhood

• Charles Schwab

• E*TRADE

 

What You’ll Need:

• Government ID

• Social Insurance Number (Canada) or Social Security Number (U.S.)

• Bank account info to fund your account

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Opening an account usually takes less than 15 minutes online.

 

Step 2: Fund Your Account

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Once your account is open, you need to deposit money from your bank account.

• You can start with as little as $50 or $100.

• Many platforms allow automatic deposits so you can invest on a schedule (like bi-weekly or monthly).

 

Step 3: Choose What Stocks to Buy

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If you're new to investing, it's smart to start with companies you know and trust.

 

Good Beginner Stocks:

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• Blue-chip stocks like Apple, Microsoft, Coca-Cola, or TD Bank

• ETFs (Exchange-Traded Funds) like:

  • S&P 500 ETFs (e.g., VOO, SPY)

  • TSX Index ETFs (e.g., XIC, ZCN)

  • These track the performance of many companies at once, reducing risk

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ETFs are a great way to diversify without having to pick individual stocks.

 

Step 4: Make Your First Investment

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Once your account is funded, search for the stock or ETF symbol (e.g., AAPL for Apple or VOO for an S&P 500 ETF), enter how much you want to invest, and click "Buy."

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• You can buy full shares or use fractional investing if your platform offers it (great for high-priced stocks).

• Always double-check before you confirm.

 

Step 5: Invest Bi-Weekly or Monthly

Consistency is key to long-term success.

Here’s  how  to  set  it  up

• Set up automatic deposits into your brokerage account every payday.

• Choose a fixed amount (e.g., $100 bi-weekly or $200 monthly).

• Buy the same stock or ETF on your schedule (this is called Dollar-Cost Averaging).

Dollar-cost averaging means you buy at different prices over time, which helps lower the average cost of your investment and reduces risk.

 

Step 6: Track and Adjust

You don’t need to check your investments every day. Once a month or once a quarter is enough for most people.

As your knowledge grows, you can:

• Rebalance your portfolio

• Add new investments

• Reinvest dividends

• Increase your contributions

 

Tips for Beginners

• Start small — even $25 per paycheque is better than nothing.

• Stay consistent — the market rewards patience and discipline.

• Don’t panic when the market dips — it’s part of the journey.

• Focus on long-term goals, not short-term noise.

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