About the market
Markets in general
There are markets for three types of products through which your advisor can trade your investments:
- one for equity investments
and ETFs - one for bonds and other fixed income investments
- one for commodities and derivatives
There is no market between buyers and sellers for mutual funds, which must be bought and sold from the fund or through an investment dealer.
Stock markets
Types of stock markets. Many different markets trade shares and ETFs. Some are stock exchanges like TSX, TSX Venture, and CNSX in Canada, and the New York Stock Exchange and NASDAQ Stock Market in the US. Stock exchanges provide a trading platform for public company shares and, to varying degrees, oversee the companies that list their securities there.
Alternative trading systems (ATSs), like Alpha, Pure Trading, Omega and Chi-X provide trading facilities for stocks listed on exchanges and aim to provide a competitive trading environment, often focused on higher speed or lower-cost transactions.
Stock exchanges and most ATSs publish their buy and sell orders, and trades, immediately for a fee and at no cost on a delayed basis.
When you tell your advisor to buy or sell shares, you will not know which market their firm will use to process your trade. That’s okay. Your advisor’s firm must follow your instructions, if any, to get the best price, the fastest execution, or whatever is most important for you. However, no matter what your instructions are, your advisor’s firm must trade on the marketplace with the best price for your order.
How markets behave
Many factors influence the price of shares. Sometimes share prices move based on fundamentals, including what a company is earning or the price of commodities. Share prices also move based on investor sentiment, such as when investors are optimistic or fearful of future events. Increasingly, computer programs manage orders, make investment decisions, and process orders very quickly in reaction to market events.
Categories:
- Sectors or industries. You can group companies together that focus on the same sort of business (such as financials, energy, or retail).
- Style. For example:
- So-called growth companies try to expand their business so that their share price will rise over time. Often these are cyclical companies whose share price rises when the economy is strong, but the share price falls when the economy weakens.
- So-called value companies are likely to grow slower than growth companies and pay dividends. Often these companies do well even in difficult economic conditions because they provide goods or services that people need no matter what the economy is doing.
- Volatility. Some stocks jump in share price some days and drop steeply on other days. Sometimes the whole market has a sudden drop as it did in May 2010, which is not a reflection on any particular stock’s volatility.
You should compare a company you are considering against another company that is like it. For example, growth companies tend to be more volatile than value companies, so don’t compare a value company, such as a bank, to a cyclical growth company, like a mining company. Once you find companies that are generally comparable, you can compare their earnings per share, price-earnings ratio, and price volatility. For more information see Understand market information.
You may also want to diversify your portfolio between different company sectors or styles. To reduce risk, you want to have investments that will do well at different points in the market cycle. See InvestRight's Diversified portfolio section for more information.
You can also buy mutual funds or ETFs that focus on particular sectors or styles of companies.
Bond markets
While bonds do trade on exchanges, they usually trade in an over-the-counter market. Your adviser’s firm will likely participate in that market with other firms. You can access information about the price that firms will pay for bonds electronically, particularly certain key benchmark bonds, but there is not the same level of transparency as in equity markets. See the Cash & fixed income securites section for more information on bonds.
Commodity and derivative markets
Producers, wholesale product buyers, and speculators participate in these markets. The majority of trading occurs in an over-the-counter market, and not on an exchange.
Derivatives include a wide range of different products, some that are very complicated (for example: foreign exchange futures and interest rate swaps) and some more traditional put options and call options on stocks. In Canada, derivatives trade on the Montreal Exchange, Ice Futures and NGX and the over-the-counter market.
Depending on the type of asset you invest in, trading in these markets may be much more risky than investing in traditional stocks and bonds. If you’re thinking about investing in these markets, do further research and consult your advisor.