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Stock investing tends to yield higher returns than putting your money in a savings account. But like any investment, stock trading has its risks. Starting with the basics, we’ll answer the question “What are stocks?” and then walk through the pros & cons of investing in stocks.
A stock is a small ownership interest in a company. Companies sell stocks to raise money for expansion and development. Say a company is worth $100 million and issues 5 million stocks. Then each stock would be worth $20.
Every stock sold gives the stockholder (or shareholder) a small controlling interest in the company, although this interest is usually passive. Stockholders aren’t typically involved in the day-to-day management of a business. The exact rights that come with owning stocks vary depending on the type of stock a company issues. But shareholders may be entitled to the following:
Like any investment, the value of shares can rise and fall depending on the success and popularity of the company, the strength of the economy, industry-impacting news and other factors.
CIBC Investor's Edge
The terms “stocks” and “shares” can be used interchangeably, but there’s actually a subtle difference between the two.
No. Company owners may choose to “go public” and sell stocks to anyone, remain privately owned and sell stocks to a limited ring of investors or remain private and not sell stocks at all. While issuing stock helps companies raise money quickly, it also requires giving up some control to shareholder interests, so not all business owners want to go this route.
If 1 person is the only shareholder, they will own 100% of the company. However, many companies choose to sell shares to multiple investors, especially when there are plans to grow.
There’s no maximum to how many stocks a company can sell. The amount of stocks varies between companies and may fall between 1 and millions of stocks. The number of stocks is not fixed forever. A company can start off with a relatively small number of stocks owned by its founders then sell more stocks later to investors.
There are 2 main types of stocks: Common stocks and preferred stocks. Common stocks come with voting rights, but preferred stocks do not. Both common and preferred stockholders could be eligible for dividends, but preferred stockholders will be paid first, so this type of share is generally regarded as less risky.
Deferred stocks are less common and only give shareholders the right to dividends after a certain period or when certain conditions have been met, for example, when the company hits a pre-defined goal.
Stocks in different companies will be worth different amounts, depending on the value of the company and how many stocks it has issued. This can change over time based on how the company performs.
If you’re a less experienced investor and want to keep an eye on things before buying, most trading platforms will have watchlists to help you monitor stock performance over time.
Buying stocks in just one company, or even several companies, is a high-risk strategy. It’s wise to diversify your stock portfolio by investing in multiple businesses across different industries and sectors.
If you can’t afford to do this, then you might be better off buying shares in an exchange traded fund (ETF). This will be naturally more diverse as the money in the fund will be split across lots of different investments.
One alternative to investing in stocks is putting your money in a savings account. This is considered a low-risk option, because your money is not at risk and you can access it at short notice. However, the interest you earn may not keep pace with inflation during rough economic times.
Investment funds like mutual funds and ETFs pool together money from lots of individual investors and invest it in a wide range of securities. It’s a relatively simple way to help diversify your portfolio.
Bonds are like loans investors give to businesses or governments. Bonds pay interest for a fixed period of time, after which you receive your initial investment back plus the interest it has accrued. Some investment funds hold bonds as well as stocks.
Buying stocks can be an exciting way to grow your wealth. You can pick which companies you want to invest in and possible receive dividends. You may also be able to vote on important company decisions. Be prepared to spend time researching the companies you want to invest in, and remember to diversify your investments to help minimize the impact of short-term losses.
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