What is a stock?
Stocks are generally considered riskier investments than cash or bonds, because their value can change rapidly. The incentive, though, is that they can offer bigger potential returns over the long run. Those higher potential returns may be necessary to some investors in order to meet investment goals.
How do stocks work?
We’ve all heard the term “stock market,” but what does it really mean? Let’s run through some basic definitions to help understand how and where stocks and shares are traded. Stocks may be more suitable for investors who plan to trade more actively, rather than buying and holding for the long term.
“The stock market” is a general term used to describe the whole system of stocks, shares, exchanges, and buyers and sellers that are involved in trading equities around the world.
If the stock market is a sport, stock exchanges are the stadiums: they are where (and how) the action happens. They provide the infrastructure and services for brokers and traders to buy and sell stocks, shares and other tradable financial assets called “securities.”
You’ll find stock exchanges all around the world, such as the Toronto Stock Exchange (TSX), the New York Stock Exchange (NYSE), Nasdaq, the London Stock Exchange (LSE) and the Japan Exchange Group (JPX).
A stock index shows the collective value of a specific group of stocks and is continually updated throughout each trading day. These indexes can be based on national groupings or stock sectors (energy, consumer staples, health care, etc.). The S&P/TSX Composite Index is a well-known example of an index, and represents stocks traded on the Toronto Stock Exchange (TSX).
By tracking the performance of a particular index, such as the S&P/TSX Composite Index, we can get an impression of the overall health of the Canadian equity market. The S&P 500 Index performs a similar role in the U.S.