Before starting anything new, everyone must go through a learning curve. Within any field, from fine art to astrophysics, this is referred to as ‘the gap,” which is the space between where you are currently and where you hope to be. This distance can feel frustrating and hopeless because where you want to be is already populated by successful people, and as a result, you view yourself as the opposite. Since this is the case, many people give up on their goals before trying to close the gap.
Stock markets introduce that same dilemma. However, if you understand the general idea of stock trading and have prepared yourself to enter the stock market effectively, you’re already well on your way to crossing the learning gap. The next thing to do is learn the lingo, strategies, and platforms for the trade exchange market.
A stock is an investment that represents a share in a company. For example, if we think of a company as though it were a pie, buying a stock is like taking a slice of the pie. You now own a small part of the company and have therefore invested in the company in exchange for a share in the profits as it correlates with the size of your investment.
The stock market hosts a collection of market exchanges. In this market, shares of public listed companies are traded and sold. At the same time, the stock market shows how stocks are being shared and performing overall.
Risk vs. Reward
When investing in company stock, the expectation is that financial profit will be returned. This profit is the perspective reward an investor can earn for every dollar risked on an investment. Therefore, the more you invest, the higher reward you may have. However, higher investment is also creating the option for a larger loss, i.e., risk.
On the other hand, low-risk investments are smaller investments that create a smaller margin for rewards, while at the same time creating a smaller margin for risk. When it comes to low-risk investments, longevity and patience are important. At the same time, a large collection of low-risk investments (a fund) can prove to be much more rewarding than one high-risk investment. An example of a low-risk investment is a bond.
A bond is a loan to a company or government that pays investors a fixed rate of return over a specific time frame. The good thing about bonds is that they are very predictable, and over time you are guaranteed to make money.
Funds are a good way to get started in the stock market because they don’t usually require you to be experts on the companies that you are investing in. Funds are a supply of capital belonging to numerous investors used to collectively purchase securities while each investor retains ownership of his own shares. Essentially, buying a fund is like buying a box of assorted treats, rather than buying a single candy.
A type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities. This mutual fund is managed by a professional who deeply understands the market. When people speak about diversifying your portfolio, this is what they mean. Investing in a mutual fund means investing in multiple different small stocks rather than one large stock in a single company. However, the fund manager usually takes a significant cut (1.5 – 2%).
Index Funds (ETFs)
An ETF is a portfolio of stocks or bonds that you can invest in, allowing you to own little shares of multiple stocks. The index is a representative sample of the stock market. While similar to a mutual fund, rather than being managed by someone, index funds are managed by a formula. In other words, mutual funds are trying to beat the market, whereas index funds are trying to match the market.
Some people prefer index funds because you end up saving a bit more money since you do not have to pay someone to manage the fund. However, ETFs do take a bit more time to return a profit. This happens by compounding interest, which is essentially reinvesting your interest into your initial loan or investment.
Whereas on mutual funds, there is no interest paid, but you may have dividends or capital gains reinvested to compound over time.
To note: all index funds are mutual funds, but not all mutual funds are index funds.
For example, ETF TXC is a fund composed of 233 stocks, including Canadian banks, CPR, and other Canadian funds. Essentially, you are investing in one index fund, which then invests in hundreds of companies.
S&P 500 Index Fund
A stock market index that measures the stock performance of the 500 largest companies listed on the stock exchanges in the USA. Each country has a different version of a 500 index fund, reasonably matching the different supply and demand needs of their own country. Investing in a 500 index fund allows you to sprinkle your investments across the top 500 funds.
Just put in a little money every month and don’t touch it, rather than trying to time the market. This is effective for people who may not totally understand the market or know which stocks to invest within.
Where and how do I trade?
Now that you understand the basics of the stock market (which hopefully doesn’t seem too daunting), the next steps include setting up your investor profile on a trading platform that works best for you. How can you trade stocks from Canada?