The Stock Market

Q.1. How does the stock market work?

The stock market is like a big marketplace where investors buy and sell stocks in a similar fashion to a flea market where people buy and sell things. The stocks do not have a fixed price. The prices change depending upon the demand for that particular stock. The demand for a stock is affected by how well the company is doing or the future prospects of the company.

Q.2. What does buying on margin mean?

You may be able to borrow money from a brokerage firm to pay for part of the cost, which can allow you to buy, for example, 500 shares of X while paying only $50, based on the current price. Remember that the price of the stock could go up or down, which means you could make or lose money on the investment. If the stock price goes up, you could earn capital gains on 500 shares, which can be a “windfall,” but if the stock goes down, the value of the stocks may no longer cover the loan, so you may have to immediately pay the “loan” in full, for all 500 stocks. Regardless, you will still have to pay back the original loan with interest and also pay a sales commission on the sale of the stock.

Q.3. How do stocks work?

When you buy stock in a company you buy a share, or equity, in the company. The price depends upon the performance of the company and the demand for those stocks. As such, if a company does well, the price goes up and your investment is worth more. Conversely, if the company does poorly, demand for that stock drops, the price goes down and your investment is worth less. When you invest in stocks, there are varying levels of risk involved depending upon your choices.

Q.4. How do bonds work?

Buying bonds means investing in debt, as opposed to equity. When you buy a bond you are lending money to that company or government for a set period of time at a set interest rate. On the due date the company or government pays you back in full with interest. Bonds can be safer investments in that you know how much interest you will make and when you will receive that money. However, you can also lose money on bonds so you need to understand what makes investing in bonds risky.

Q.5. What are mutual funds?

Mutual funds allow you to invest in a group of stocks or investments. Funds from a number of people are pooled together and the investments for the group are selected by a professional investor who becomes the fund manager and decides when to buy and sell investments for the fund. You buy units of the fund with your investment and you pay fees for the management service. The amount you pay is typically referred to as a MER: Management Expense Ratio.

Q.6. Where do I buy mutual funds?

You can buy mutual funds at banks, trust companies, life insurance companies, credit unions, caisses populaires, mutual fund dealers and brokerage firms.

Q.7. What are GICs?

Guaranteed Investment Certificates (GICs) are similar to loans you are making to a bank, trust company or credit union. That organization pays you a set interest rate to borrow your money for a set period of time. You must invest at least $500. Although they pay a relatively low return, they are among the safest of investments.