Key Components of Stock Trading

Stocks

A stock is an investment that represents a share in a company. For example, if we think of a company as though it were a pie, buying a stock is like taking a slice of the pie. You now own a small part of the company and have therefore invested in the company in exchange for a share in the profits as it correlates with the size of your investment.

Stock Market

The stock market hosts a collection of market exchanges. In this market, shares of public listed companies are traded and sold. At the same time, the stock market shows how stocks are being shared and performing overall.

Risk vs. Reward

When investing in company stock, the expectation is that financial profit will be returned. This profit is the perspective reward an investor can earn for every dollar risked on an investment. Therefore, the more you invest, the higher reward you may have. However, higher investment is also creating the option for a larger loss, i.e., risk.

Bonds

A bond is a loan to a company or government that pays investors a fixed rate of return over a specific time frame. The good thing about bonds is that they are very predictable, and over time you are guaranteed to make money.

Investment funds

Funds are a good way to get started in the stock market because they don’t usually require you to be experts on the companies that you are investing in. Funds are a supply of capital belonging to numerous investors used to collectively purchase securities while each investor retains ownership of his own shares. Essentially, buying a fund is like buying a box of assorted treats, rather than buying a single candy.

Mutual funds

A type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities. This mutual fund is managed by a professional who deeply understands the market. When people speak about diversifying your portfolio, this is what they mean. Investing in a mutual fund means investing in multiple different small stocks rather than one large stock in a single company. However, the fund manager usually takes a significant cut (1.5–2%).

Index Funds (EFTs)

An EFT is a portfolio of stocks or bonds that you can invest in, allowing you to own little shares of multiple stocks. The index is a representative sample of the stock market. While similar to a mutual fund, rather than being managed by someone, index funds are managed by a formula. In other words, mutual funds are trying to beat the market, whereas index funds are trying to match the market.

S&P 500 Index Fund

A stock market index that measures the stock performance of the 500 largest companies listed on the stock exchanges in the USA. Each country has a different version of a 500 index fund, reasonably matching the different supply and demand needs of their own country. Investing in a 500 index fund allows you to sprinkle your investments across the top 500 funds.

Where and how do I trade?

Now that you understand the basics of the stock market (which hopefully doesn’t seem too daunting), the next steps include setting up your investor profile on a trading platform that works best for you. How can you trade stocks from Canada?

Editor-in-Chief | Journalist | Creative Director. Everything here is inspired by conversations with friends.

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