Stock Market Basics for Canadians

What is a stock, really?

A stock (also called a share or equity) represents a slice of ownership in a company. If a company has issued 1,000,000 shares and you own 1,000 of them, you own 0.1% of that business — including a proportional claim on its future profits and, if the board declares one, its dividends.

Companies sell shares to the public to raise money for growth without taking on debt. Once shares are issued, they trade between investors on an exchange, like the Toronto Stock Exchange (TSX) in Canada or the New York Stock Exchange and Nasdaq in the U.S. The price you see quoted is simply what the last buyer and seller agreed to — it moves constantly as new information changes what investors think the business is worth.

• Common shares: the typical stock most people buy, with voting rights and variable dividends
• Dividends: optional cash payments a company makes to shareholders out of profit; not all companies pay them
• Market capitalization: share price multiplied by total shares outstanding, a rough measure of company size

How the stock market actually works

An exchange is essentially a matching engine: it pairs buyers and sellers in real time. When you place an order through your brokerage, it's routed to the exchange where your stock is listed and matched against someone willing to take the other side of the trade.

Stock prices move based on supply and demand, which in turn reacts to earnings reports, interest rate decisions from the Bank of Canada or U.S. Federal Reserve, economic data, and plain old investor sentiment. Short-term price swings are largely noise; what tends to drive returns over years and decades is whether the underlying businesses grow their earnings.

It's worth separating two things people often lump together: investing in individual companies, and investing in the market as a whole through a fund. Most Canadians building long-term wealth do more of the latter, because predicting which single company will outperform is far harder than it looks, even for professionals.

Stocks, ETFs, and mutual funds — what's the difference

A single stock ties your outcome to one company. If that company struggles, so does your investment — there's no cushion. This is why concentrated bets in one or two stocks carry more risk than most people realize.

An exchange-traded fund (ETF) holds a basket of many stocks (or bonds, or both) and trades on an exchange just like a single stock. A broad-market ETF tracking, say, the S&P 500 or the TSX Composite gives you instant diversification across hundreds of companies in one purchase, usually for a low annual fee.

Mutual funds work similarly — pooling money to buy a diversified basket — but typically trade once a day at end-of-day pricing rather than throughout the day, and often carry higher fees than comparable ETFs, particularly if actively managed.

• Diversification lowers company-specific risk but does not eliminate market-wide risk
• Lower-fee funds keep more of your return over decades, since fees compound against you the same way growth compounds for you
• Index funds/ETFs simply aim to match a market benchmark rather than beat it

Getting started as a Canadian investor

You'll need a brokerage account to buy stocks or ETFs. Most Canadian banks offer discount brokerage arms, and several standalone online brokers operate in Canada as well; compare trading fees, account fees, and whether they offer registered accounts before choosing one.

For most Canadians, the smart move is to invest inside a registered account rather than a taxable one, because the tax treatment is materially better. A Tax-Free Savings Account (TFSA) lets investment growth and withdrawals happen completely tax-free, up to your available contribution room. A Registered Retirement Savings Plan (RRSP) gives you a tax deduction on contributions now, with growth deferred until you withdraw in retirement (typically at a lower tax rate). Contribution limits for both change most years, so confirm the current figures directly with the CRA before contributing.

If you're saving for a first home, the First Home Savings Account (FHSA) combines features of both and is worth understanding alongside the TFSA and RRSP. Whichever account you use, the mechanics of buying a stock or ETF inside it are identical to a regular brokerage account — the account type just governs the tax treatment.

Time horizon matters enormously. Money you'll need within the next year or two generally doesn't belong in the stock market, given how much prices can swing in the short run; a high-interest savings account or GIC is a better fit for near-term goals.

Frequently asked