Stock (Share)

A slice of a business

Buy a stock and you become a part owner of a company. Not a lender, not a customer: an owner. If the company earns profits, your slice of them belongs to you, whether the board pays them out in cash or reinvests them to grow the business. If the company puts a question to its shareholders, you normally get a vote in proportion to the shares you hold. And if the company were ever wound up, shareholders would split whatever remains after every debt is paid, which is why a share is called the residual claim on a business: you own what is left over, for better or worse.

Almost everything that trades under the word "stocks" is the standard voting kind, the common share. A smaller category, the preferred share, trades away most of the upside in exchange for a fixed dividend and behaves so differently that it has its own article. Everything below describes common shares.

How a stock pays you

A stock can only reward you in two ways. The first is the dividend, a cash payment the company chooses to send its shareholders, typically every quarter in Canada. The second is price appreciation: your shares becoming worth more than you paid, because the business grew or because investors are now willing to pay more for it.

Your total return is simply the two added together. A stock that pays a 3% dividend and rises 4% in a year returned 7%. A stock that pays nothing and rises 7% returned exactly the same. Judging a stock by its dividend alone, or by its price chart alone, misses half the picture. Many young, fast-growing companies pay no dividend at all and deliver their entire return as price growth, while mature businesses pay steady dividends and grow slowly.

Where stocks trade, and how Canadians buy them

Canadian stocks trade mainly on the Toronto Stock Exchange (TSX), home to the country's banks, railways, insurers, energy producers and other established companies. Smaller, earlier-stage companies list on the TSX Venture Exchange, a far more speculative corner of the market. Most of the world's largest companies trade on the major US exchanges, and any Canadian brokerage gives you access to those as well.

To buy stocks directly, you open a brokerage account, fund it, and place an order for the shares you want; most Canadian brokerages now charge low or no commissions on stock trades. The account itself can be a plain taxable account or a registered one, and the choice matters for tax, as covered below.

The third route is indirect: owning stocks through funds. An ETF or index fund holds hundreds or thousands of stocks in a single purchase, which removes the job of picking companies entirely. An honest observation: for most people, most of the time, funds are the sensible route. Choosing individual stocks well is genuinely hard, even for professionals who do it full time, and a broad fund captures the market's return without requiring you to be right about any single company.

Risk: what stocks can do to you

An individual stock can go to zero. Companies shrink, get disrupted, and sometimes fail outright, and when one does, shareholders stand last in line behind every creditor and are usually wiped out. This is not a rare curiosity; it happens to well-known companies in every decade, which is the core argument for diversification.

The market as a whole is a different animal. Broad stock markets fall hard and surprisingly often, sometimes by a third or more, but a diversified market has something no single company has: it constantly replaces its losers with new winners. Historically, broad markets have recovered from every crash and gone on to new highs, given enough time. No one can promise that pattern continues, but it is the foundation on which long-term stock investing rests: own the whole market, and time, not timing, does the work.

That points to a distinction worth keeping sharp. Investing is buying a share of productive businesses at a reasonable price and holding long enough for their profits to compound. Speculating is buying something mainly because its price is moving and hoping to sell it to someone else before the music stops. Both happen in the same brokerage account with the same buttons, which is exactly why the distinction is easy to lose.

How stocks are taxed

In a taxable account, selling shares for more than you paid triggers capital gains tax, with half the gain added to your taxable income, and dividends from Canadian companies come with the dividend tax credit, which lowers their effective tax rate. Inside a TFSA, both gains and dividends are entirely tax-free; inside an RRSP, they compound untaxed until withdrawal. That is why most Canadians are best served holding most of their stocks inside registered accounts first, and only spilling into a taxable account once the registered room is full.