If you’ve ever heard people say things like “I’m investing in the stock market” or “I bought shares in Apple,” you might have wondered what that really means. This article explains what stocks are and how to invest in them.
What is a Stock?
A stock (also called a share) is a tiny piece of ownership in a company. Let’s say a company is like a giant chocolate cake. The company can cut that cake into thousands (or millions!) of pieces and sell each piece to people. If you buy a piece, you’re buying a share of that company. That means you own a small part of the business.
Example:
If a company has 1,000 shares and you own 10, then you own 1% of the entire company!
Why Do Companies Sell Stocks?
Companies sell stocks to raise money so they can grow. They might want to build new stores, create new products, hire more people, or pay off debt. Instead of taking a loan, they sell part of the company to people like you and me. When people buy those shares, the company gets money, and in return, investors get a piece of ownership.
How Do You Make Money with Stocks?
There are two main ways to earn money from stocks:
- Capital Gains – Buying Low, Selling High
Let’s say you buy a stock for $20. A year later, the company becomes very successful, and the stock price rises to $35. If you sell it, you make a $15 profit. This is called a capital gain.
- Dividends – Getting Paid to Own a Stock
Some companies reward their investors by paying dividends, which is a small part of their profit shared with you. This can be monthly, quarterly, or annually.
Example:
If you own 100 shares in a company that pays a dividend of $0.50 per share every quarter (every 3 months), you’ll earn $50 every 3 months just for holding the stock.
Can You Lose Money?
Yes. Stock prices can go down as well as up. If you buy a stock at $20 and the stock falls to $12, you lose $8 if you sell at that time.
The key is to understand that investing involves risk, and staying informed about how the company operates and the decisions it makes is essential to managing those risks—especially since stock prices can also be influenced by factors beyond the company’s control.
What is the Stock Market and What is a Stock Exchange?
The stock market is like a giant marketplace where people buy and sell stocks. Think of it like a large shopping mall that sells all available products. A stock exchange is like a store within that shopping mall – you can enter the store and buy any security you need; if you don’t find what you need, you go to another store. Some of the largest exchanges are:
- New York Stock Exchange (NYSE) – USA
- NASDAQ – USA
- Toronto Stock Exchange (TSX) – Canada
How Do You Buy Stocks?
Buying stocks nowadays is not complicated. You don’t need to be rich or go to a fancy banker. You can buy stocks using online platforms called brokerages. The major banks in Canada provide these on-line trading platforms – for example, BMO InvestorLine, TD Direct Investing, RBC Direct Investing are offered by the respective banks.
What To Know If You Want to Start Investing in Stocks?
- Start Small: The most important step is to get started with a small amount and learn. Some trading platforms even let you buy fractional shares, so you can invest in expensive companies like Amazon with just a few dollars. Once you start investing, you will be more inclined to keep track of what is happening in the market and with the stocks in your portfolio.
- Don’t Put All Your Eggs in One Basket: Try not to invest all your money in just one company. Spread your money across different companies or industries. This is called diversification, and it helps reduce risk.
- Think Long-Term: Many investors make the mistake of trying to get rich quick. But historically, people who invest slowly and consistently over time tend to build more wealth.
- Learn Before You Leap: Research the companies you’re planning to invest in. What do they sell? Are they making profits? Do they have growth potential? Reading financial news or company updates helps a lot. You can use a top-down or a bottom-up approach.
- Top-Down Approach: Begin by analyzing the broader industry you’re interested in. From there, narrow your focus to a specific sector. Learn about the key players, understand the drivers that influence company performance, and based on this research, identify a few promising companies to explore further.
- Bottom-Up Approach: Start with a company that interests you. Gather all publicly available information (just Google it!). Next, step back to understand the sector in which the company operates. Finally, zoom out further to evaluate the industry as a whole and consider its overall direction.
Final Thoughts
Stocks are one of the powerful tools to grow your money over time. You don’t have to be a financial expert to get started. With a little curiosity, a willingness to learn, and investing discipline you can start building your portfolio.
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Senior Analyst
Sandeep Suresh is a Senior Analyst, Investments at Embark. He holds an MBA in Finance and is currently pursuing his CFA Charter. In his free time, he enjoys breaking down complex financial data into clear and digestible insights.
