The stock market is the place where stocks (also known as "shares") of publicly owned companies are listed to be bought and sold. Unlike a private company, a public company applies to have its shares sold to the public on a stock exchange, like the Toronto Stock Exchange.
Public companies must follow a certain set of guidelines to keep their listing with a stock exchange. For example, public companies are often required to provide the public with annual financial results that are audited by an independent accounting firm. This means that most publicly traded companies must have their finances freely available, to be held accountable by their public owners. Stockholders vote on significant company changes, as well as vote in director elections. They also have the right to contact the companies they hold stock in directly, with any questions or concerns.
The most widely known stock exchange in Canada is the Toronto Stock Exchange, or TSE. Listed on the TSE are Canada's most senior companies, like Telus, Loblaw's, and the Royal Bank of Canada. There is also the TSX Venture Exchange, which is an exchange most commonly used by smaller companies.
How do I buy and sell stock?
To buy and sell stock, there are three things you will need:
A bank account
A brokerage account
A company's ticker symbol
Opening a brokerage account
A brokerage account is an investment account designed to hold publicly traded investments, like stocks. Almost every bank and credit union in Canada either provides their own brokerage services, or are partnered with a third-party brokerage to help you buy and sell stocks. Some banks, like RBC, allow you to open up a brokerage account online, while others require an in-person meeting.
A brokerage account is opened using a bank account to fund it, such as a tax-free savings account (TFSA). Stocks purchased through your TFSA are tax free on interest, dividends, and capital gains, which makes the TFSA an ideal account for funding your stock purchases.
Knowing your company's ticker symbol
After you are set up with your brokerage account, the broker you use will have an online platform that allows you to buy and sell stock online.
Once you know what company you would like to buy shares in, the next step is to know the symbol the company uses to represent its stock on the exchange you would like to purchase it through, known as its "ticker." For example, Telus shares are purchasable on the TSE under the ticker symbol TSE:T.
Once you select the stock you wish to buy, and the account that you would like to buy it with, a series of options will appear, such as the choice to place a "buy" or "sell" order, the type of order you wish to place, such as a "limit" or a "market" order, and the quantity of stock you wish to purchase or sell.
In the example above, the action I have taken is to place a buy order for 10 shares of Telus "at the market." Buying shares at the market simply means that the order will execute at whatever the highest sell offer is for them. Buying at the market is generally okay for large companies, but might not be the best idea for smaller companies.
There are two ways to know if buying or selling at the market is the wrong choice. The first is to look at how wide the "bid-ask spread" is. The bid-ask spread represents the dollar spread between buy and sell orders made by investors. A "bid" represents an offer to buy shares, and a "sell" represents an offer to sell shares. If the bid-ask spread is wide (2% or greater), it's probably best to place a limit order.
As an example, let's say you want to buy stock in company ABC. You note that shares of ABC last sold for a price of $23.54 per share, but people are placing bids to buy the stock for $22.50 per share, and sellers are placing asks to sell the stock at $24.50 per share. As a result, if you were to sell ABC at the market, you would take an immediate 4.4% loss from the last sale price ($22.50 - $23.54 ÷ $23.54 x 100 = -4.4%). Conversely, a buy order at the market would end up with you buying shares at a 4.08% premium ($24.50 - $23.54 ÷ $23.54 x 100 = 4.08%), yikes!
The second way to know if placing a market order is the wrong choice is to look at the stock's volume of shares bought and sold that day, or on average. For example, if 500 shares of ABC are traded on average per day, that means that, at a price of $23.54, the daily volume might only amount to about $11,770 ($23.54 x 500 = $11,770). $11,770 is a lot of money, but not when it comes to the daily volume of shares traded at a public company. By contrast, the average number of Telus shares traded in a single day is about 2.2 million shares. At a price of $27.45 per share, that means that, on average, over $60 million dollars worth of Telus stock is bought and sold in a given day. The higher the dollar volume of shares traded, the tighter the bid-ask spread is likely to be.
In the event that you really want to buy stock that has a wide bid-ask spread, or isn't very liquid (its trading volume is small), it's safer to place what's known as a "limit order." A limit order is where you set the price that you wish to buy or sell shares at for the day, where the order will only occur, in part or in whole, if someone else buys or sells at the limit that you have set. For example, instead of placing a buy or a sell order at the market for ABC, it might just be best to set your limit at its last sold price of $23.54. This isn't a perfect science, but ultimately limit orders are designed to protect investors from falling prey to a wide bid-ask spread, and potentially buying or selling shares for a price much different than they hoped.
Are buying common stocks worth it?
Since we have just gone through how to buy stocks, it is important to know that the amount of work required to understand whether or not your common stock is worth owning is extremely extensive. A few key steps an investor must follow to ensure that a stock is a good investment are:
Knowing what the company does, as well as its competitive position
Being able to assess the quality of the company's management team, as well as how their compensation structure may influence their behavior
Having a deep understanding of financial analysis, with the ability to read an income statement, balance sheet, and cashflow statement, in order to monitor financial health and measure profitability
Knowing how to reasonably project a company's future earnings and growth potential
Regularly keeping up to date with quarterly and annual filings
And, importantly, knowing how to asses the economic value of the company in relation to its present and future earnings potential, to make sure that you're not overpaying for the stock.
The fun part is that this list covers just a few points on the process on how to intelligently buy a common stock. This is why we don't discuss common stocks on Rainbow Wealth, as we want to empower you to be able to make financially smart decisions for yourself with a strong understanding of what you're doing.
That said! The process of buying a common stock is the same for a preferred stock, which is a type of stock that we do discuss at Rainbow Wealth! This is because preferred stocks are easier to assess and understand versus their common counterparts, and they pay regular dividends to their owners. They are still a little complex, but once you get the basics, the rest is quite easy! Feel free to check out my article that provides an overview of preferred stocks here. That's all loves!