o3 BLOG | Investing
What are stocks and how do they work? How to invest in the stock market
What are stocks and how do they work? If you’re reading this, you are probably considering investing in the stock market but might be unsure of where to start. As luck would have it, we’ve put together this back to basics investment blog post just for you. Did you know that if you invested $10,000 in the S&P index 50 years ago, that your investment would be worth roughly $1.2 million today? Before you start kicking yourself for not investing sooner, we want to let you know that it’s not too late to start investing in stocks. When approached strategically, stock investment can help you develop long-term wealth.
What Are Stocks and How Do They Work?
A stock is a financial instrument or security that reflects ownership of a portion of a corporation or a company. Owning stock allows the stockholder to share the corporation’s assets and profits in proportion to the amount of stock they own. Stock units are referred to as “shares.”
The majority of stocks are bought and sold on stock exchanges. However, some stock purchases are private and make up the foundation of many seasoned investors’ portfolios. Any transaction involving stocks must comply with federal regulations to protect against fraudulent activity. The Canadian Securities Administrators (CSA) is the regulatory organization that services Canadian investors and securities issues in Canada. The U.S. Securities and Exchange Commission is the regulatory organization, and similarly to the CSA, it ensures that market environments remain fair.
Are you interested in gold investment products that yield maximum results? Check out our blog post: Investing in Junior Mining Stocks — The Potential For Massive Rewards.
How to Invest in Stocks in Canada
With a strategic investment approach, many novice investors can begin building portfolios that will prepare them for financial freedom. The economic impact of the COVID-19 pandemic has made many Canadians realize that they are underprepared for emergencies. While maintaining a savings account is helpful, the interest rates of even high-interest savings accounts are often below 1.5%. According to Morningstar, the average long-term annual rate of return on the S&P/TSX Composite Index (TSX) was 9.3% (p.a.) between 1960 and 2020. Allocating some of that savings for investments will give you a much higher rate of return.
We’ve put together a brief step-by-step guide to help novice investors get their feet wet and have a better understanding of stock market investing.
What Are Stocks and How do They Work: A Beginner’s Guide to Stock Investing
- Outline Investment Goals and Choose the Right Investing Style
- Set Up an Online Investment/Brokerage Account
- Decide on an Investment Strategy
- Look into stocks and ETFs to Invest in
- Execute Your Trades
- Monitor and Improve Your Portfolio
1. Investment Goals and Investing Style
Typically, people choose investment goals based on a few categories — age, income, and outlook/lifestyle. Are you planning on buying a house in the next few years? Do you want to help secure a better financial future for your growing family? In the event of an emergency, how much would you like to have set aside? If you’re investing for your retirement, how often do you plan on playing golf? These are only a few of the questions that can help you establish investment goals.
Investing Style
There are several approaches to investment style, and they range across the market. There are different types of fund strategies depending on portfolio allocation and risk tolerance. Risk tolerance is typically grouped into conservative, moderate, or aggressive.
2. Set Up An Online Investment or Brokerage Account
If you are the DIY type and want to be in charge of your own finances, opting to set up an online brokerage account is for you. An online brokerage account allows you to pick your own stocks and ETF without the need for a financial advisor. Many online brokerage services will enable you to trade with low or no commission fees. Every major bank in Canada offers brokerage for self-directed investors, making it convenient to manage your investments through your regular financial institution.
3. Investment Strategy
Having a solid investment strategy will help set you up for success. If you want a hands-off or passive investment strategy, investing in indexes is the way to go. Index investing techniques work by buying an ETF or index mutual fund that follows a stock market index like the TSX Composite or the S&P 500. You can quickly build a diversified portfolio with anywhere from one to five ETFs representing domestic, U.S., and international stock markets, as well as government bonds. Your portfolio follows the market, so index investing is less time-consuming and leaves less room for error. The drawback is the returns might not be as significant as they would be through other strategies. Also, although index techniques are relatively low-risk, your investments might suffer in the event of a financial crisis — which is why you should always invest in gold or gold stocks to hedge against inflation or a falling market.
4. Exchange-Traded Funds (ETFs)
ETFs are investment funds that allow you to invest in a group of bonds and individual stocks in one purchase. You can track a specific index, like the TSX, commodities, bonds, or a range of different assets in one pool. ETFs trade like stocks with fluctuations in price as they’re traded on the market. Investors profit from interest in the ETF asset pool and can maintain a diversified portfolio without investing in individual company stock.
Investing in Dividends
Dividends are some of the most common investments because they allow investors a steady stream of income. Dividend stocks typically perform well in the long run.
When researching stocks and dividend-paying companies, you want to ensure that there will be long-term profitability. Look out for companies with consistent growth that are well-funded and have experienced Senior management teams. Investors should turn to companies with promising growth and provide corporate presentations that attest to that. Some good resources to track stocks are Yahoo! Finance, Marketwatch, and Bloomberg. You will want to familiarize yourself with investing terms, especially in the precious metals sector. Check out our blog post on mining terminology that will help you speak our language.
5. Start Trading Online
Every online brokerage or bank has a unique interface, but the core methods are relatively similar. You can also purchase direct stocks from companies through purchase plans. If you go this route, we suggest you contact the investor relations team, who will help guide you through this process.
Before you make your first trade, you need to consider the following:
Stock Value
The stock value is the price posted through your online brokerage on a market website or price at its most recent trade. Highly traded equities fluctuate often, but not by much. Equities that are traded less frequently fluctuate more in price. Keep in mind, the price you pay for or receive for a stock isn’t always the same as what is posted — bid and ask prices determine that.
Price of Bid
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 stocks in market orders. If the bid price is too low, you can place a limit order for a higher price, where you wait to see if the price reaches that desired amount.
Price Requested
The price requested, or ask price, is the amount that a seller is asking for a stock. You will pay this amount when you buy stocks in market orders. Just like bidding, you can place limit orders to wait and buy at the specified amount.
6. Monitor Your Portfolio
If you’re actively investing, you’ll need to stay in the loop of market trends and what is impacting your portfolio. Depending on the market, you might need to buy or sell. Things such as your investment’s last quarter performance can signal you to sell or buy more. If you’re a passive investor with a long-term focus, you might be buying and selling on a fixed schedule. Regardless, both novice and seasoned investors must make data-based decisions to maintain the strength of their portfolios.
Just like riding a bike, investing gets easier with time and practice. There is a lot to learn, and there are many resources that will allow you to develop skills and knowledge to apply to your investment strategy. And the next time someone asks you, “what are stocks,” you’ll be better prepared to answer them!
To learn more about investment opportunities that offer long-term value, contact the O3 Mining Investor Relations team today.