by Victoria Scrozzo
The stock market is exceedingly complex and difficult to understand.
But TD Newcrest stock analyst John Dire says the first step to understanding those cryptic letters and numbers in a newspaper’s financial section is to begin with what it’s made up of: stocks.
Corporations are split up into shares — or stocks — that can then be purchased by investors. A stock is a portion of ownership of a publicly traded company, which is a business that is incorporated, as opposed to privately owned. When you buy a stock, you are buying a part of that company.
Like any other product, stocks need a place where they can be bought or sold, and stock exchanges provide that place, Dire says. The Toronto Stock Exchange (TSX), New York Stock Exchange (NYSE) and American Stock Exchange (AMEX) are some of the more familiar exchange markets.
Investing in these markets can be done in a few different ways.
“If you invest through your bank, you’re investing in mutual funds, which are a collection of stocks,” he says. “Mutual funds are the most common investment. The risk is spread out and you have a professional money manager who is buying and selling stocks for you.”
The second option is a retail stock broker who works for a brokerage house such as TD Waterhouse, Charles Schwabb and Edward Jones, Dire says.
Stock brokers buy and sell stock for you and take a commission out of each trade. The amount of the commission depends on the broker.
Before you put your hard-earned money into the hands of a broker, they’ll ask you a series of questions unrelated to the stock market to assess your risk tolerance. If you’re a “bear” you’re generally a more cautious investor and are less likely to take risks; a “bull” is more likely to go charging ahead on instinct and risk more, Dire says.
The amount you choose to invest is up to you. It should be a percentage of your net worth, and while $1,000 may seem like pennies to someone on Bay Street — Toronto’s financial district and home of the TSX — it may seem like a fortune to a university student.
Some stocks are more profitable than others because of the amount of risk involved in buying them. For instance an “income stock” is a stock in a mature business, such as a bank, where there’s little room for growth and little fluctuation in prices of the stock. Profits (dividends) are paid out to investors.
In comparison, profits made through “growth stocks” are reinvested back into the company, allowing for it to expand. When a company grows, so does its profit potential and the price of its stock increases. Growth stocks are riskier investments, but tend to be more lucrative for shareholders.
Various things can affect the price of stock, says Ryerson economics professor Constantine Angyridis.
“You need to follow the trends of leading economic indicators, rate of growth domestic product and the inflation and interest rates,” advises Angyridis. “When gas prices go up or there’s going to be a war, this uncertainty brings the stock market down.”
On the flip side, he adds, if for instance a pharmaceutical company releases a new drug that cures breast cancer, its stock will rise because investors will know that unique product will be very successful by consumers.
Dire says in the end it boils down to supply and demand.
“A stock is only worth what someone is willing to pay for it.”