Written by John Robertson
Part 1: What is a Stock
Saving for the future is very important, but savings alone can make reaching your financial goals very hard. If every dollar you want to spend in the future – say, for retirement – you have to earn and hold on to first, it can make the idea of meeting your future goals seem daunting.
For someone spending 40 years of their life working and planning for a retirement of 30 years, they would have to save a huge portion of their income to be ready. That or plan to have a big cut to their lifestyle in retirement, neither of which is an appealing choice.
To get ahead, we need to not just work ourselves and save from those paycheques, we need to get our money working too.
There are many different ways of making your savings grow: for example, you could start a business, or buy a property that you rent out. However, those options take a lot of time and effort. In many cases it’s more like buying a second job for yourself than simply getting your money to work for you. More importantly, you typically need a lot of money available to do either of those.
However, you don’t have to do it all on your own.
The Power of Shares
One of the most powerful inventions to drive capitalism was the corporation. Corporations allow many people to become investors in a company, and for each of them to own a portion, or a share of that company. If you’ve managed to save $4000 through the year, that may not be nearly enough to buy an apartment building, the equipment for a restaurant, or to build a factory, but you can get together with other people with money to invest and create a corporation. Each of you could own a share of the company.
If the company makes money and becomes more valuable, then your share in it also becomes more valuable – as part owner, you own a portion of those profits.
There are many ways for you to get your money (and hopefully the profits it has generated for you) back out of the company an into your hands. The most common way is to sell your share of the company to someone else looking to invest their money.
The Stock Market
Indeed, there are already a multitude of other people out there looking to invest their money in partial ownership of companies, while others are ready to sell their shares. Many large companies are registered as public companies, and their shares trade on a stock exchange.
With stock markets and so many companies already in business, there’s no need to go and find a group of friends or co-investors to create a new company from scratch to get your money invested. You can instead simply buy shares of an existing company on the stock exchange and not create a second job for yourself.
We call those companies with shares available “stocks” – hence stock market as a place where you buy and sell stocks – and also refer to owning shares as “equity” or owning shares in many companies as “equities”. All three terms – shares, stocks, equities – are used somewhat interchangeably to refer to investing your money in companies.
Companies list their stocks on a stock market so investors can buy (and later, sell) those shares easily. A company can divide its ownership up into as many or as few pieces as it likes. So two companies may both be worth the same total amount, but have different number of shares and hence prices per share. For example, if Company A is worth $10M and divides its ownership into 10 million shares, each share would be worth $10. Company B meanwhile might have the same $10M total value, but split itself into just 5,000 shares worth $2,000 each. This means it rarely makes sense to try to directly compare shares in one company to shares in another.
There are many stock markets in the world, with the Toronto Stock Exchange, New York Stock Exchange, and NASDAQ being the ones you will most likely hear about and actually use. But you won’t have to travel to Toronto or New York to buy your shares of stock to get your money invested in equities. Trading in stocks is done electronically, and the exchanges don’t deal directly with individuals. Instead, you will use the services of a brokerage firm to place your orders for you. There are many brokerages to choose from, including those from each of Canada’s big banks as well as a few independent brokerages. These days you will almost exclusively make your purchases on your own through your brokerage’s a web interface.
You want your money to grow, and an important part of making that happen is to own stocks (sometimes called owning shares of companies or equities). Buying equities in existing companies can be easy if they are listed on a stock exchange, and you can get started with just a few thousand dollars saved. At the end of the day the important thing to understand is that when we talk about owning stocks or buying equities is that you are buying or owning small parts of businesses.