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Stocks 101

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Find out how stocks work and how they may fit into your investment plan.

Stocks 101

#1: How do stocks work?

When you buy stock (or equity) in a company, you receive a piece of the company and become a part owner.

Stocks 101

#2: What is common stock?

The majority of stocks (shares) sold are common stocks. Common stock offers the potential for growth through rising share prices and increasing dividends. Prices of common stock tend to be more volatile than the prices of preferred stock. Common shareholders typically get voting rights at shareholder meetings.

Stocks 101

#3: What is preferred stock?

Preferred stock (shares) offers regular income through fixed dividends and the potential for growth through rising share prices. The prices of preferred stock tend to be more stable than the prices of common stock. Preferred stock may offer features such as the right to redeem your shares at certain times or to convert your shares to common shares at a certain price. However, preferred stock doesn’t normally come with voting rights.

Stocks 101

#4: How do stocks make money?

There are generally two ways to make money on stocks. First, the stock can increase in value. If you sell the stock for more than you paid for it, you’ll have a capital gain. Many factors affect the price of a stock.

Second, the company may pay a dividend – a share of its profits. Companies are not required to pay a dividend. If a dividend is paid, what you receive is based on the number of shares you own.

Stocks 101

#5: What are some risks?

Two key risks associated with investing in stocks are that returns are not guaranteed, and you may lose money. Depending on the company and the type of stock you own, you may face a number of other types of investment risk. A financial advisor can help you understand the risks, and learn how to manage the risks – for example, by diversifying your portfolio.

Stocks 101

#6: Where are stocks are traded?

Stocks are traded on exchanges like the Toronto Stock Exchange (TSX), or other marketplaces like Alternative Trading Systems (ATSs). These exchanges and marketplaces bring together people who want to sell stock with those who want to buy stock.

Stocks 101

#7: How do you buy stocks?

Stocks can be purchased through full service investment firms, discount brokerages or portfolio managers. You will pay fees to buy stocks – these could be commission-based, fee-based or pay-per-trade. Learn more about fees to buy stocks.

Check the registration of any company or advisor before you work with them by going to CheckBeforeYouInvest.ca.

Stocks 101

Learn more about stocks

To learn more about factors that affect stock prices, monitoring stock performance and where to get information on a company, visit GetSmarterAboutMoney.ca.

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