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About 55 percent of adults in the US invested in stocks in 2019. The scenario isn’t very different in Canada where a huge number of people invest in the stock market since it offers great returns.
The stock market can be intimidating and risky, but there’s no denying the fact that investing in stocks is one of the best ways to build wealth in the long term.
In this article, we’ll talk about how to start investing in the stock market.
Why Invest in the Stock Market
Stocks offer the greatest potential for capital appreciation or growth over the long haul. The market has endured ups and downs over the years but the benefits of investing in stocks haven't changed.
Here’s why stocks are still a viable investment:
You Can Start Cheap
Stocks are a well-worn path to make your money work harder. The good thing is that you do not need to fork out thousands to get your feet wet. You can start for as low as $100 and even lower in some cases.
There is no limit on how much money you invest in stocks. You only need to decide where and how to invest. We'll discuss your options later in this article.
Let You Outrun Inflation
Inflation causes your money to lose value. The inflation rate in Canada hovers between 2 and 3 percent. Most saving accounts and CDs do not pay over 3 percent, which means at the end of the day you will make no profit on your investment if you choose these options.
On the other hand, the average return on stocks is 10 percent and some may pay even more in the long haul. At the end of the day, you will make money without losing purchasing power.
Allow You to Diversify Your Portfolio
Diversification is the best way to safeguard your investment. Never put all your eggs in one basket. You can opt for a variety of options including bonds, real estate, and stocks.
Plus, there are several options when it comes to stocks. You can choose stocks in different niches to reduce the risk.
A Fast Way to Increase Wealth
While there's no guarantee of how your investment will perform, stocks are still considered a reliable way to increase wealth. You only need to be careful about where you invest.
Companies like Amazon, Facebook, and Apple, for example, are considered safe. They've more than doubled in the last few years. Think about this. If you had invested in Amazon when it first went public, you'd be sitting on more than $120,000 today.
Companies like Amazon and Facebook may be too expensive for some investors today but there’s still hope for new and growing companies.
Help is Available
A very good thing about investing in stocks is the fact that anyone can do it. You do not need to know about the stock market to make money through stocks. You can work with an investment firm or manager who will invest your money on your behalf and work to give you returns.
They will charge you a fixed rate for their services in addition to commission on profits, and in turn will take care of everything from buying to selling stocks so you can make the most money.
Who Should Invest in the Stock Market
The answer is simple: anyone who wants to build wealth.
There are no eligibility criteria. However, most countries and states require you to be 18 before you can open your own account. If you’re under the legal age then you may have the right to invest in a custodial account.
We suggest that you only enter the arena if you’re aware of the risks. Stocks are highly volatile and they may lose money. Also, the stock market isn’t the right option for investors looking for quick gains. It is best for investors who can forget about the investment for five to ten years since they can take a while to increase.
Before You Invest Do This
Before you invest any money into stocks, make sure to take the following steps:
Pay Off High-Interest Debt
Get rid of any high-interest debt and invest money you have saved for investment purposes. Never invest the money you cannot afford to lose or the money you’ve saved for other purposes.
Create an Emergency Fund
As mentioned earlier, investment is a risky business. Never count on it to bring you out of trouble. You should create and maintain an emergency fund so that you do not have to sell your stocks in a hurry.
Find Out How Much You Want To Invest
Know how much money you can afford to invest. This is important because you may lose all or a part of your investment, hence be careful about how much you can afford to lose.
The first step is to find out your net worth. Make a list of your assets, your liabilities, and calculate what each item is worth.
You will arrive at your net worth by subtracting total liabilities from your total assets. This way you will know how much money you can invest.
Take out a small part of your savings as emergency funds for rainy days. You don't want to invest everything due to the risks involved. The stock market keeps fluctuating and it may be a while before you learn the art and make decent profits. Hence, it’s important to be careful.
Have An Investment Goal
What are you planning to achieve? What is the purpose of your investment? You need to answer these questions before taking the big leap so you can decide how to go about your investments and what your aims are.
There are two main types of stock that you should know about:
- Common Stocks: Common stocks have a greater market value compared to preferred stocks. They also give shareholders the right to vote and have a say in the corporate meetings. However, it depends on how many shares you own. They have a right to corporation's residual profits (dividends) but only after preferred stock owners have been paid.
- Preferred Stocks: Shareholders with preferred stocks do not have voting rights but they do have an advantage. They receive dividends from the company for the percentage of their shares and in the event of liquidation of the company they are entitled to receive assets as well.
Next, decide whether you want to do short term trading or you want to invest for the long term. In short term trading, you buy and sell stocks within a few days or weeks or maybe even the same day.
Short-term trading can be pretty unpredictable and risky because of the fluctuations in the market on a day to day basis but keeping a close eye on which stocks are trending up or down can give us a good idea on whether it is a good time to buy or sell in the short run.
Short-term trading can help you make quick money but there is a greater risk involved. Given the unpredictable nature of the stock market, a better and safer option would be to make long-term investments.
In this case, you will have to be patient and be okay with the idea that your capital will be tied down for a long time, even years in some cases. In the end, you will get a greater and better reward in term of profits especially due to the gain in the value of shares.
Consider Facebook, it was trading around $30 in 2012 but is worth $180 now. This means, if you had invested $1,000 in 2012 you would’ve made a profit of $5,000 today.
Decide Between Stocks Or Mutual Stock Funds
You have two options to start:
- Own Stocks: Buying a stock means buying a piece of ownership in the company. If the company is doing well, your stock value will rise and you will make a profit. On the other hand, if the company suffers a loss, you will be trouble as well. This option is suitable for users who know about the industry and like the DIY approach. It’s a highly risky option that gives you a lot of control and power.
- Try ETFs: You have the option to turn an exchange-traded fund, often called an ETF. It is an investment fund that's traded on exchanges just like stocks and holds multiple assets like bonds, stocks, and commodities. ETFs typically operate with an arbitrage mechanism made to keep it trading close to the account’s net value. ETFs are highly liquid and can be traded throughout the day, unlike mutual funds that are priced at the end of the day.
- Turn to Funds: It's a financial vehicle made up of a pool of money collected from a variety of investors to invest in different stocks. Mutual funds are managed by professional managers or firms who charge a commission and other fees for their services.
This is a suitable option for users who do not know about stocks or are too busy to keep an eye on changing trends. You can count on the manager to take care of the matter.
Here, your main job is to choose the right firm. Plus, you will have little control over your money.
Think About The Company You Want To Invest In
It is imperative to research the market and then come to the decision of which company you want to invest in.
It is better to take interest in companies that are familiar to you or ones that you have an interest in so you can properly understand how they work and how they plan to make money.
Look at the company's business model and judge how they plan to make a mark in the market. Look for companies who have a competitive advantage over their competitors. This is known as ‘economic moat'.
Companies with good economic moat will always be more profitable and a good investment in the long-term.
Look at financial reports and observe the net income for the current year and for previous years as well. A company with high-profit margins even in times of recession shows that the demand for its products is high among consumers. A profitable company will equally benefit its shareholders with good returns on their investments.
Look for companies that pay a dividend to their shareholders. It shows that the company's financial position is strong and it is also a source of regular income for investors.
Always keep the future in mind when choosing a company but remember that past performance cannot be a reliable indicator of future performance.
How Do I Start Investing in Stocks?
Here’s how you can start investing in stocks:
Hire a Broker
Brokers are agents who trade assets for their clients. They earn a commission on each trade no matter how it goes. In addition to this, they also offer services such as tips and trading advice on closing and opening prices.
You can go to brokerage firms to find a broker but some also work on the trading floor at stock exchanges. Some stockbrokers charge a flat fee. Make sure to work with a licensed and registered broker who has experience handling different portfolios.
You can ask questions such as the average return, some popular clients they have worked for, etc.
Hire a Financial Advisor
The job of a financial advisor is to assess the financial needs of clients and help them with investments including stocks. Some financial advisors may also provide suggestions on insurance and tax.
Unlike brokers, financial advisors cannot trade on behalf of clients. They can only provide tips and suggestions and the client has to make the final call.
It may be a good idea to work with a financial advisor if you do not understand finances or if you have specific financial goals.
Since they provide tips on the overall financial situation, they can help you streamline all your investments, and provide tips on where and how to invest money.
Use a Robo Advisor
Robo advisors provide investment management or financial advice online with little to no human intervention. They provide digital advice based on algorithms and rules.
There are software to execute these algorithms, removing the need to require human intervention. These software can perform a variety of tasks including automatically allocating, managing, and optimizing clients' assets.
You will find hundreds of robo-advisory services. Make sure to pick one that's known to be safe and reliable. Most service providers charge a fixed fee and commission for their services.
Do It Yourself
If you do not want to pay fee or commission or if you trust your knowledge then consider doing it on your own. You can find an investment platform to trade stocks. Other options include:
- Direct Stock Purchase Plans: Some companies offer stocks directly to buyers. However, in most cases you will have to invest a large sum – about $500 – or agree to invest a small sum every month – about $50 – for a specific time period.
- Dividend Reinvestment Plan: More popularly known as DRIP, this plan lets investors take cash dividends paid out by the company they own to buy more shares. It’s a smart way to buy stocks without paying commission.
Using an online platform can be a bit tricky since you will have to handle everything on your own from opening and closing orders to deciding how many stocks to purchase. It is important to go through the guide and learn more about the stock market before you invest.
Online Brokerage Versus Traditional Brokers
You can manage and purchase your own investments through an online trading portal such as Questrade, Scotia iTRADE, and Qtrade to name a few.
First and foremost, you will need an investment account which is called a brokerage account. Setting up a brokerage account is quite simple. Fill the application form online and set up an account. You may need to submit some documents to verify your identity.
Once that is done, you can deposit the money in your account to initiate buying stocks. The number or types of companies available change from brokerage to brokerage, hence be careful.
The major advantage of online brokerage is cost saving. There are reduced fees and transaction costs compared to the costs associated with brokerage firms.
Typically you will pay only $5 to $10 for buying and selling stocks through online brokerages, whereas the cost is much higher if you avail services through a traditional broker.
Moreover, with online trading, you can make the trades and execute stock exchanges with just a click. It saves time and given the rapid fluctuations in the stock market can prove to be beneficial for investors.
Plus, thanks to apps, you can also monitor your trades and see the status of your investments in real time. You can choose between full service and discount brokers.
- Full Service: They offer a full range of services, including healthcare, financial advice, etc. However, they typically only work with big clients, starting at $25,000 or more, and are more expensive as well. Most will charge a membership fee and commission.
- Discounted: Discount brokers are popular. In fact, according to this report, about 58% of Americans will turn to such providers by 2025. They have low minimum making it a good option for small users.
If you want to invest but would like assistance then the best option would be to go with a traditional brokerage. The services they provide will cover all grounds for investments and also include comprehensive financial advice related to healthcare, retirement plans, real estate, etc.
The other option is to meet agents by visiting a physical brokerage or the nearby stock market. They will ask for your requirements and buy the stock on your behalf.
This can be a good option if you like to discuss the investment face-to-face. However, expect to spend a lot on fees as some brokers can be very expensive. Plus, you will have to take care of physical documents and travel.
Employers: You may also have the option to invest through your employer. It’s best to discuss the situation with your employer.
The biggest difference is in terms of costs and ease. Do a bit of research and compare different options to pick one.
Invest And Keep An Eye On It
Now that you have made an investment, it is time to keep an eye on the changing scenario so you know:
- When to Buy More
- When to Sell
- When to Keep
These are the three most important decisions you will make as an investor.
- It is best to buy more if you expect the prices to go up.
- It is best to sell if you expect the prices to fall.
- It is best to hold if you expect no changes.
Holding may be a good option if there are no high holding costs.
Pro Stock Market Tips
Now that you know about how to invest in the stock market, check out some tips on how to ensure your investment gives good results:
Be a Long Term Investor
If you want to enjoy high returns then forget about your investment for at least five years. Some experts believe that stocks can take between 10 and 15 years to mature. There is typically no cost of selling stocks but doing so may cause you to reduce your potential income.
Also, do not get rid of a stock just because it appears to be going downward. Dumping may not always be the best option unless you’re sure that the value will never go up. For example, if a company is about to go bankrupt then you may get rid of the stocks but if it’s seasonal fluctuation then hold on to the asset.
Prices usually always go up if the company is healthy. In fact, falling prices can be a good time to invest more. We suggest to build up positions gradually instead of going all in.
Understand Your Risk Tolerance
Stocks are highly volatile and very risky. The value of a stock often changes within a few hours and it isn’t even uncommon for stocks to lose or gain 50 percent in a single day.
You should know exactly how much you can afford to lose before you invest your money into stocks. We recommend you to only invest the amount you can afford to lose so that you can handle the loss if things go haywire.
The best option is to plan ahead. and avoid heat-of-the-moment decisions. Write down what makes your stocks worthy of a commitment and highlight the circumstances that would justify a breakup.
Be clear about when to buy and when to sell.
Do not put all your money in a single stock. Find multiple stocks in various niches to reduce the risk. Diversification will reduce the risk and help you soldier through the storm.
If a company fails, you’ll still be able to cover the losses from the profits you earn through other investments. Plus, diversification will also help you stay afloat when the market goes down. This is because, in most cases, some industries continue to do well even in poor market conditions.
Control Your Emotions
“Success in investing doesn’t correlate with IQ … what you need is the temperament to control the urges that get other people into trouble in investing,” suggests Warren Buffett.
When it comes to investment, you should never make emotional decisions. For example, invest in a company you trust in, not because you like it. This is why some experts suggest to work with a professional or broker since they look at things from a neutral angle.
Invest in What You Know
Some argue that stock trading is based on luck but there are algorithms that can help you make the right decisions. Whether you’re investing on your own or seeking the help of a professional, it is important to invest in what you know.
Stay away from a brand or company that you know nothing about even if it looks good. There is very little risk of scams when it comes to stock trading, but prices can often be inflated artificially to attract buyers.
If you like a stock then study about it, check past numbers, read financial documents, talk to experts about it, and then invest your money. Also, choose companies and not symbols since they can leave people confused.
Some other tips include investing in mutual funds to reduce the risk, not timing the market, having a balanced portfolio, and keeping an eye on value stocks.
Investing In Stocks FAQ’s
Can I Buy Foreign Stocks?
It is possible for you to buy foreign stocks but it may not be the best option unless you are well aware of the foreign industry.
Here’s how you can buy foreign stocks:
- You can contact your brokerage firm and ask if they provide foreign trading services.
- Set up an account at a brokerage firm that offers foreign stocks.
Stocks are generally described as a slice of ownership in one or more companies whereas shares are a more specific term and describe ownership of a particular company only.
How Much Do I Need To Start Trading?
This depends on the type of brokerage you want to apply for, whether online or traditional and what kind of stocks you want to invest in, keeping in mind the cost of commissions.
You can start with as little as $5 but remember that the amount of money you will make depends on how much you invest.
Can I Lose Money?
Yes, you can lose money in a lot of different ways while trading.
If your stocks aren't doing well and you have to sell lower than the buying value you will incur a loss. Plus, you have to pay commissions as well, which is technically a loss if you are not making a good amount of money.
How To Sell Stocks?
The basic way to sell a stock is through a sell order. You can ask your brokerage manager to execute a sell order for you or do it yourself if you use an online platform. The process is immediate in most cases.
What is the Best Tip for Beginner Investors?
Do not be greedy and only invest the money you can afford to lose. Pay attention to fundamentals, keep an eye on changing trends, do your own research, and know that timing is the most important factor.
Are Stocks Good for Beginners?
Stocks can be risky and hence not the best for beginners but you have to start somewhere. We’d suggest you start with a small amount to see how things go for you.
When Can I Start Trading?
You need to be at least 18 years of age to start trading.
What Is A Good Time To Invest?
The best time to buy is when the market is falling. You will be able to buy good stocks at a lower price. However, if you find stocks with good fundamentals you can buy them even if the market is high. The main thing is to choose the right thing to invest in.
Investing in the stock market can go either way for you. It can bear very fruitful results and provide you with good profits or result in losses.
Make sure to play it safe and never be greedy.
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