Even if you arent planning to buy stocks yet, you should get to know the stock market. Learning how it works can help you become a more educated investor - and just might pay off in the long run.
You know the expression Buy low, sell high? Well, its not just a cliché - its the basic strategy for succeeding in the stock market.
When you buy a stock, you are actually purchasing a very small piece of a corporation. Youre hoping the company does well and its stock price goes up over time, so you and the other shareholders can make money when you sell.
Of course, this has a downside. If the company doesnt do well, the stock price takes a dive - and you could lose part or all of your investment if you decide to sell.
Do your homework
As with most choices, research is the best place to begin. Reading an easy-to-understand book on financial planning is a good way to get a solid understanding of the basics of investing. (For a list of good Canadian sources, check out our Recommended Reading list at the end of the article.)
Then, you need to start thinking about which stocks to research. To help you decide, you can let your own interests guide you, follow a given industry or business, or keep up generally with whats going on in the business news.
Being aware of business trends will provide a good framework for understanding the market. But to get specific, youll need to become acquainted with the stock tables in your newspaper.
Reading the stock tables
When you flip open the stock section of the newspaper, it might look intimidating at first. The print is tiny and the pages are crammed with numbers!
Dont be alarmed. Its just a matter of understanding the columns. A key at the top of the first page usually provides some definitions.
Here are some of the basic terms youll encounter:
- If you were going to buy a stock, you would identify it by its ticker symbol, which is usually 2-5 letters in length and appears beside the company name in the tables.
- The 52-week high/low tells you the highest and lowest price of the stock for the last 52 weeks. These numbers give you the best idea of the stocks average fluctuating price range.
- The high and low columns tell you the highest price the stock sold for during the previous day and its lowest selling price. Note: If youre looking up stock information online during trading hours, the high and low prices you see will be for that days trading activity.
- The volume is the number of shares traded, usually expressed in hundreds. A high volume means that a lot of people are trading the stock, while a low volume shows that there wasnt much trading activity.
- The change tells you the difference between the days closing price and the previous days closing price.
- Stocks in bold closed at least 5% higher or lower than their previous close.
- A dividend is the amount of money paid to shareholders annually for each share they own of that companys earnings.
Now that you can read the tables, the next step is to focus in on a couple of companies. Take a close look at how the stocks move over time alongside real events such as news of possible mergers, new products or layoffs.
Only by doing this will you really begin to appreciate the trends and fluctuations that make the market so complicated - and get some insights about whether a given company is a good investment.
To buy or not to buy?
Thats a big decision, obviously, since buying stocks can be expensive. Youre not just paying for the stock - you may also be paying to complete the transactions and/or the stockbroker who makes the trade happen.
Your choice really boils down to how much money you have, and what kind of risk you can afford to take.
A word about mutual funds
A safer route might be a mutual fund, where you own a pool of relatively low-risk stocks and a theres a manager who makes the investing decisions. You can still track the price of your stocks, but a professional invests your money for you.
You can get a Quick Quote for your stocks, read some research reports and browse the Financial Education Centre.
Suggested reading list
- The Wealthy Barber, David Chilton
- A Woman Of Independent Means: A Womans Guide to Full Financial Security, Gail Vaz-Oxlade
- Personal Finance for Canadians for Dummies, Eric Tyson and Tony Martin
- The Money Advisor: The Canadian Guide to Successful Financial Planning, Bruce Cohen
- The Power of Index Funds: Canadas Best Kept Investment Secret, Ted Cadsby
Note: CIBC is committed to helping you make informed financial decisions. These books may assist you. Provision of this list is not an endorsement by CIBC of any specific financial strategies set out in these books.
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