Sunday, February 23

What is the stock market?

Google+ Pinterest LinkedIn Tumblr +

While the stock market might seem intimidating at first glance, it’s surprisingly easy once you get started. In fact, if you’re not a day-trader, investing in the stock market can be downright boring.

An introduction to the stock market for dummies

You can think of the stock market just like any other market: a place where you buy and sell goods. It’s actually not that different than the farmers market, except that your purchases tend to continuously get better than age rather than rot if you don’t eat them fast enough. 

RELATED POSTS

What exactly is the stock market?

A stock market is a place where investors buy and sell securities. Financial securities include stocks, bonds, and exchange traded funds (ETFs). You can and should own the diversity of these investments in your portfolio when you invest in the stock market.

When we say “stock market” we tend to refer only to the New York Stock Exchange (NYSE), but most major economies have their own stock exchanges. Some companies are cross-listed on more than one stock exchange, but most will only be listed on the stock exchange of the country they are registered in. As an investor, you can invest in securities traded on different stock exchanges. However you have to be cognizant of time zones, tax laws, and currency exchange rates when doing so!

The New York Stock Exchange (NYSE) and Toronto Stock Exchange (TSE) are the primary North American stock markets. They are open Monday to Friday (except holidays) from 9am EST to 4pm EST. You can only trade securities during market hours on days the stock market is open. 

What exactly is a stock?

A stock is a type of financial security that represents part ownership in a corporation. When you own a stock, you are a shareholder of a corporation. Being a shareholder provides you with rights, responsibilities, and a share of profit in a company.

Can you make money in the stock market?

Yes! You can actually make a lot of money in the stock market. In fact, investing in the stock market is the best way to build long term wealth. The average historical stock market return is 10% per year. It’s certainly better than your savings account!

There are two ways to make money by investing in the stock market: capital gains and dividends. Some investors prefer one strategy over the other, but most use a blended approach of both to grow their wealth.

Capital gains

Capital gains are the classic “buy low, sell high” method of investing. Your purchase a stock at a low price, and then sell it for a higher price sometime later, pocketing the difference. 

Investing for capital gains is the highest risk, but also highest reward method of investing in the stock market. Your potential for a return is unlimited! Sometimes investors get lucky and can double or triple (or more!) their initial investment through capital gains. But sometimes you don’t!

It is important to note that not all stocks go up in value. It’s possible to buy a stock, and then have the price go down. When you sell at a lower price than you bought it for, this is a capital loss.

Dividends

Dividends are a disbursement of profit a company earns to shareholders. Not all stocks pay dividends, but for the ones that do, it’s an incredible passive income stream to investors.

In order to receive dividends, you don’t have to do anything more than own a stock. As a shareholder of a dividend-paying stock, you’re entitled to dividends! They will be automatically deposited in your brokerage account on the dividend payout date. 

Dividends are usually less of a return than capital gains, often only 1% to 3% of a stock’s value but sometimes higher. However, because they pay dividends out on a monthly or quarterly basis, they are a reliable and consistent return on your money. Furthermore, because many companies tend to increase their dividends over time, you can consistently earn more money the longer you own a security. 

Want more info? Check out our post on Dividend Investing: The Ultimate Passive Income Source!

How to invest in the stock market

Accessing the stock market is easier than ever. You can open a brokerage account online, buy and sell securities on your mobile phone, or you can even have a roboadvisor do all the work for you. In fact, you have no excuse not to invest!

Self-directed investing vs using a robo-advisor

If you’re going to invest for yourself, this is called a “self-directed portfolio”. You’ll need to open a brokerage account, and then you’re responsible for selecting the financial securities you want and buying and selling them yourself. The best and most affordable online brokerage account is Questrade.

Questrade

Self-directed investing gives you the most control over your investment portfolio. However, you have to know what you’re doing. If you don’t know what you’re doing when trading on the stock market, you’re not investing — you’re gambling!

In the past, investing in the stock market was time-consuming and required a fair bit of financial literacy to access. Now all you really need to know is that you should be investing, and to open a roboadvisor account. The most userfriendly robo-advisor out there is Wealthsimple.

Wealthsimple Review

Robo-advisors give you less control over your portfolio, but they’re also considerably less work than a self-directed portfolio. In fact, they are no work at all. You simply need to put your money, and they’ll invest it for you.

Need more info? We’ve got a course for that!

No matter what you choose, the important thing is that you overcome your investing fears and get started investing sooner rather than later. A robo-advisor like Wealthsimple is the first step for everyone, so begin there no matter what your financial situation!

However, if you think you’d really like to capture those major capital gains and create a passive income stream of dividends to eventually replace your income, then a self-directed portfolio is the only way. 

The Six-Figure Stock Portfolio is an eCourse that guides you every step of the way, from your first dollar to $100,000+ in the market. 

Whatever you choose, the most important part of investing is getting started. Don’t wait to start creating a wealthy future for yourself!

Share.

About Author

Student debt killer, super saver, and stock market addict. BSc. in Chemistry from the University of Alberta, MBA in Finance from the University of Calgary. CEO x 2 and MOM x 1. Currently residing in Calgary, Alberta, Canada, but hooked on travelling.

2 Comments

  1. The 2008 crash recovered within a year, but the 1929 crash took 25 years to recover. Are you afraid of another 1929 at all? I know it’s rare, but it’s possible. After knowing that it took 25 years to recover, now I’m questioning whether I should stop putting that much into the stockmarket.