How Do Stocks Function?

 

Stocks are typically seen as having greater growth potential than fixed-income investments, such as bonds. However, they also carry a higher level of risk.

 

If the company you're invested in performs well, the value of its stock will likely rise, allowing you to make a profit. Conversely, if the company faces difficulties and the stock price falls, you might experience a loss. Gains or losses are only realized once you sell the stock.

You may also receive dividends, which are payments made to shareholders from the company’s profits. As a shareholder, you have a claim to a portion of the company's earnings.

 

There are two main types of stocks you can buy: common stock and preferred stock, each with distinct features.​

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How to Buy Stocks

To invest in stocks in Canada, you must open a brokerage account. You can do this by  by setting up an online, self-directed account. Within your brokerage account, you can hold stocks in registered accounts, such as tax-free savings accounts (TFSA) or registered retirement savings plans (RRSP). You can also hold stocks in non-registered accounts, which are taxable accounts that you can use for both short- and long-term investments.

Instead of purchasing individual stocks, you can also invest by buying exchange-traded funds (ETFs) or mutual funds, which pool together a selection of stocks and other investments. These options allow you to diversify your portfolio without needing to research individual companies extensively.

 

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

The primary way to profit from stocks is by buying shares at a low price and selling them at a higher price. If you buy preferred stock, you’ll earn money by holding the stock and collecting dividend payments.

 

For instance, if you purchase 100 shares of a company at $6 each, your total investment is $600. If the stock price rises to $10 per share and you sell your 100 shares, you will receive $1,000. Subtract your initial $600 investment, and you make a $400 capital gain.

 

However, buying low and selling high is easier said than done, as stock prices are influenced by supply and demand. It’s often difficult to find stocks that are significantly underpriced.

 

The best approach to making money from stocks is a long-term investment strategy.

 

Time Frame and Stock Investment

Your investment time frame plays a critical role in stock market success. If you're planning to invest over a short period, the stock market may not be the best option, as you could face losses if the market drops.

 

The only way to realize a loss is by selling a stock at a lower price than you paid for it. However, if you hold onto the stock, there’s a chance it may recover over time. If you're prepared to ride out market downturns, purchasing more shares during a decline could lead to substantial gains when the market rebounds.

 

Since its founding in 1861, the Toronto Stock Exchange has seen substantial market fluctuations, which underscores the importance of a long-term investment strategy. While no one can predict market movements with certainty, maintaining patience and sticking to your investment plan are key to achieving success over time.