Have you always wanted to invest in the Canadian stock market, but had no idea where to start? You’ve come to the right place. In this article, I’ll show you everything you need to know about the basics of stock market investing.
Are you ready? Let’s dive in!
Unlocking The Mysteries Of Stock Market Investing
Too many people make stock market investing more complicated than it needs to be. It’s as though investing is a great mystery, one that can only be solved by those with special insight and knowledge.
Thankfully, buying stocks doesn’t have to be a complex process. In fact, just about anyone can learn how to buy stocks with a little time and effort.
The first step is to open a brokerage account. Yes, it’s true that you need a broker in order to buy stocks.
The good news is that in 2019, you don’t need to visit a stock broker in person, call someone on the phone, or become engaged in a complicated transaction.
You can buy and sell stocks from the comfort of your living room, through an online discount broker. You don’t need very much money, either.
In many cases, it’s possible to open a brokerage account and start investing with as little as $50. Look for a reputable account online, and then open your account. Once you do that, you will be able to start buying stocks.
Online brokerage accounts are fairly easy to find. In Canada, there are no fewer than 12 leading discount brokerages vying for your investment dollar.
While you can check all of them out in this recent review of Canadian Online Brokerages, my top choice for online brokerage in 2018 is Questrade.
How Do Stocks Work?
If you’re new to the world of stock market investing, you may be wondering what a stock is in the first place.
Stocks, also referred to as shares, represent ownership in a corporation. They give the owner of the stock, also known as the shareholder, a claim on company assets and earnings. They can also grant the shareholder other benefits, such as voting rights.
To use a basic example, if a company issued 1000 shares, and you purchased 100, you would hold a 10% ownership of that company.
Of course, large corporations such as Google, or Royal Bank, are worth billions of dollars, with outstanding shares numbered in the hundreds of millions, so 100 shares would be a drop in the bucket when it comes to your claim on ownership.
But 100 shares is significant inside an individual portfolio, and can provide an investor with an opportunity for strong growth over the long term.
Types Of Stock
Corporations issue two main types of stock: common and preferred. Each type can be divided into several different classes, but these are the main categories.
Common shares provide the owner with voting rights at shareholder meetings, while preferred shareholders have a preferred claim on earnings, such as dividends. Preferred shareholders also have priority if the corporation were to go bankrupt.
Common shares are, exactly as they sound, more common.
What Is An ETF?
Exchange Traded Funds (ETFs) have become incredibly popular in recent years, and just might be the best way to get started with stock investing.
ETFs are groups of stocks that track the performance of a particular stock market index. With ETFs, Instead of trying to pick individual stocks, you receive the benefit of several stocks.
The benefit to a novice investor is that you don’t have to try and learn how to buy stocks before you get started. A solid ETF, can be a great way to get started.
ETFs vs. Index Mutual Funds
At first glance, an ETF might seem similar to a mutual fund, in particular an index mutual fund, but there are some key differences.
While ETFs and index mutual funds both offer an indexable basket of securities, ETFs are more flexible than an index mutual fund, in that they can be traded just like an individual stock.
They also lack the management fees (MER’s) of a mutual fund, although most brokers do charge a trading fee on ETFs. Depending on your strategy, ETFs can be advantageous to index mutual funds.
Because of their simplicity, ETFs may also be the best way to get started with stock investing. Once you are more comfortable, you can move forward and learn how to buy individual stocks.
How To Choose Stocks
Choosing individual stocks for your portfolio begins with research, and lots of it.
To start, get as much information as you can on the companies you are interested in, learning about how they are run, as well as the potential they have for future growth.
Also, consider whether or not the stocks you choose are a good value. There are many different ways to evaluate stocks, and you can learn them and then apply them.
The important thing is to get started. An ETF can help you get started with investing, and start earning compounding returns, while you learn the ins and outs of how to buy individual stocks.
Make It Automatic
No matter how you choose to invest, or where you put your money, one of the best things you can do is to make it automatic.
You want to make sure that you invest regularly, since that is a good way to make sure that you are earning better returns over time.
Decide how much money you can invest each month, and have the money automatically withdrawn from your bank account and used to invest in shares of an ETF or a particular stock.
This investing technique is known as dollar cost averaging, and it’s used by investors of all experience levels not only for convenience, but to enhance investment returns over the long term. Here’s how it works.
What Is Dollar Cost Averaging?
Dollar Cost Averaging (DCA) involves the purchase of investments in smaller amounts on a regular schedule, ie. monthly, bi-weekly, rather than in lump sums, less frequently.
Automating the purchase of investments removes the need for an investor to try timing the market, as over the long term the investments will be purchased at a lower average price. This is where the true value of dollar cost averaging lies.
Example Of Dollar Cost Averaging
Let’s assume an investor decides to purchase $1,000 worth of XYZ Corp. at the same time every month for four months. In this example, we’ll also assume that the stock first declines in value, but then rallies strongly.
As you can see in the table above, using a dollar cost averaging strategy the investor would have purchased 272.22 shares for a total of $4,000. His/her average price per share for this period would have been just $14.69 (calculated as follows: $4000 / 272.22 = $14.69). With the stock ending at $18 at the end of this period, the investor’s total position would now be worth $4,900 (calculated as follows: 272.22 shares * $18 = $4,900). As a result, the investor would actually show a profit of $900 on his/her overall position despite the fact that the stock declined in value over the full four-month time period (dropping from $20 to $18).
By comparison, if the investor had decided to invest $4,000 in shares of XYZ Corp. all at once at the beginning of this period, then he/she would have purchased 200 shares at a price of $20 per share. With the stock finishing at $18 at the end of the four months, the investor would have shown a net loss of -$400 on the stock.
This example clearly illustrates the benefits of dollar cost averaging, especially during periods of volatile share prices.
With dollar cost averaging, you can start small. As you earn more money, and learn more about investing in stocks, you can increase your contributions, as well as start finding other stock investments that will help you reach your financial goals.
Categories: Personal Finance