• What the market does
• How stock prices are determined
• How to get started buying and selling

Interested in the stock market? It can be a powerful tool to help you reach your financial goals, and can be easier to understand than it may seem. But if you’re feeling intimidated, overwhelmed, or in the dark when it comes to the stock market, don’t worry – you’re not alone in this.

In Canada, this part of the financial world isn’t common knowledge. Less than half of Canadians own stocks – approximately 39% – and participation isn’t everything. Sometimes people who own stocks don’t have a full understanding of the market. Another study found that, among Canadians who do invest, only one third actually know how investing works.

What is the stock market?

If you’re unsure of what a stock really is we recommend reading this Stock 101 guide first but if you’re already familiar with them feel free to dive right in.

Stock market is the term used in reference to all stock exchanges – where investors come together to buy and sell shares of companies from each other.

In the past, the stock market only operated physically at stock exchanges, where people met in-person to buy and sell. Today, these stock exchanges largely operate online as a digital space that allows buyers and sellers to get the same job done.

Globally there are over 60 major stock exchanges. The largest one as of August 2021, is the New York Stock Exchange (NYSE).

How it works

So, let’s say you want to buy a stock. How does it actually happen? The answer: stock brokers.

The stock market works by having licensed stock brokers trade shares on a stock exchange for buyers and sellers.

Some brokers are still real human beings who work in-person at an exchange, but they are a rarity. Today, most of what brokers do is completed electronically. Platforms like Questrade are an example of this.

Even though much of the brokering is done electronically nowadays, traditional trading hours apply to many stock markets.

For example, in Canada the Toronto Stock Exchange (TSX) is open for trading Monday to Friday, from 9:30 am to 4 pm ET, except for stock market holidays which are announced ahead of time.

When you start saving money, you might experience savings accounts or GICs with set rates of return that you know in advance.

So, when you think about investing in the stock market it might seem natural to ask “how much can I make in the stock market”?

The only accurate answer is: it depends.

What does it depend on? Two of the bigger factors that can impact your rate of return are:

• Your investment risk
• Your time in market

Let’s look at each of those factors individually.

How does investment risk impact my rate of return?

Risk in investing doesn’t just refer to a single factor. It refers to the overall chance that your investment can deviate from the expected rate of return. Most of us just consider the negative side of risk (i.e. lower rates of return than anticipated) but the definition applies to any variation from the expected rate (most people just don’t mind a higher return than expected).

Risks can include things such as competition from other companies, or huge factors such as a global pandemic.

Risks and returns are often correlated, which means that if you want the possibility of a higher rate of return, you might need to accept a greater risk of loss in your investments with no guarantee of return.

How does time in the market impact my investment return?

One simple word – compounding.

When you invest, you’re essentially putting your money to work earning money for you. Over time, you can put the money they earn to work for you as well by re-investing it.

If you continue that cycle and allow your funds to remain invested, they can compound and greatly increase in value over time.

What is the historical investment return of the markets?

The historical performance of individual markets can vary, but let’s take a look at the S&P 500 as an example.

The S&P 500 is an index that tracks the price of 500 large public companies listed on US stock exchanges. It was expanded to include 500 companies in 1957. Between 1957 and 2021, the index averaged an annualized rate of return of roughly 11.88%.

If you look at the TSX Composite Index ¹, over the 50 year period from November 30, 1971 to November 20, 2021, the average annualized return was 7.94%.

While past performance is no guarantee of future results, this gives you some guidance as to how stock markets have performed historically over long periods of time.

¹Past performance is not necessarily indicative of future returns.

Note: The information in this blog is for information purposes only and should not be used or construed as financial, investment, or tax advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Green Stock Asset, Inc., its affiliates or any other person to its accuracy.

• The impact to the market from COVID-19 is unprecedented but not entirely new
• How bull and bear markets performed in the past
• What you should do in times of high market volatility

In addition to the health concerns that come with COVID-19, we’ve seen unprecedented volatility in the stock markets. At times like these it can be easy to forget that these types of events have happened before. Historically while markets pull back in times of disruption and crisis they have usually recovered those losses and more in the years that followed, and, when viewed over the long term, provided positive return.

The below chart shows how the U.S. stock market based on the S&P Dow Jones Indices has rebounded from different crises and the performance of specific bear and bull market periods.

As you can see, the DJIA index in the visual above has not only recovered from past losses but has gone on to have huge returns. Even the financial crisis of 2008 was followed by a period where the return exceeded 400%. While history is not a predictor of what might happen in this situation hopefully it does provide some helpful context for you about the recovery from prior significant events.

So while in the short term it is easy to panic, over the long term the benefit from regular investing could be strong. Remember, we are always here to help and support you because we care deeply about helping all Canadians achieve long term financial success and security. And we wish you the very best in health during these challenging times.

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Note: The information in this blog is for information purposes only and should not be used or construed as financial, investment, or tax advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Wavefront Capital, Inc., its affiliates or any other person to its accuracy.