Websites, magazines, podcasts, and entire television channels are dedicated to them – stocks (also called shares or equities). I cannot write all there is to know about stocks in a short article but let’s start with the basics.
What are Stocks?
First, you need to understand corporations. Corporations are businesses whose ownership is split up into pieces called shares. The number of shares a corporation has can vary from millions to billions. Owning a share/stock represents partial ownership in a corporation - the more you have the greater your ownership.
How to Make (or Lose) Money?
Corporations want to make their stock owners (aka shareholders) happy. So, many corporations share their profits with shareholders through dividends. The amount and frequency vary and are never guaranteed.
The other way you can make, or lose, money in stocks is through trading. Simply put, if you sell a stock for more than you purchased it, you make money; if you sell it for less, you lose money.
Where are Stocks Traded?
Publicly traded stocks are traded publicly on stock exchanges. Stock exchanges are like flea markets for investments where buyers and sellers haggle over a fair price. The agreed-upon price is then posted. Prices fluctuate throughout the day as buyers and sellers are matched. All trades are anonymous. Buyers and sellers do not know who is on the other end of the trade.
The largest global stock markets, by market cap, are:
Privately traded stocks are often small companies owned by people involved closely in company operations – employees and lenders. Shares are not available on any exchange and can only be traded with the corporation's approval – hence private.
The Risks
Stock markets historically trend upwards over the long term, however, due to their potential for sharp fluctuations within a short period, stocks are considered high risk. Privately traded stocks pose additional risks due to their trading difficulty. Technical research and expertise are required to invest in stocks wisely - both of which don’t ensure positive returns. Diversification is important – spreading money across different companies, sectors, and investment types.
Most Canadians hold stocks within ETFs or mutual funds over holding stocks directly. On you’re your statements, stocks are listed as equities. Generally, the higher the percentage of equities you see, the higher the risk of your portfolio.
Above all, your portfolio must match your risk tolerance, which can change over time and should be checked regularly. To discuss your equity exposure and risk tolerance, contact us at KLT Wealth Management.
- Courtney Beach, QAFP
