Warren Buffett defined investing as “forgoing consumption now to have the ability to consume more at a later date.” Furthermore, investing puts your money to work so it can grow over time. The way I like to think about investing is “every dollar invested today is another hour you won’t have to work later.”
Beginner investors are advised to start by investing in ETFs and mutual funds rather than individual stocks. Mutual funds and ETFs consist of many individual securities such as stocks, bonds, and commodities, but are traded like regular stocks. Their diversity makes their value less vulnerable to market swings.
Define Your Risk Tolerance
Knowing how much money you’re willing to risk and lose in the market is important to determine if you want to succeed in the stock market. By understanding your risk tolerance you’ll also be able to decide what kind of investor you want to be whether it be long-term, short-term, aggressive, or more conservative.
Determine how much you can Invest
Before investing, you should have reliable active income, an emergency fund, adequate savings, and little to no high-interest debt. A common misconception about investing is that you must have a lot of money to start, which is false. You don’t need to have a lot of money to start investing - you can start with as little as $10 and if you start investing small amounts consistently, you’ll see long-term growth.
Decide your Investing Style
Active investors usually do everything themselves from choosing an online broker, doing extensive market research and analysis, and picking which stocks to invest in. Passive investors, on the other hand, don’t have much time to study the markets or aren’t interested in being as involved therefore, they hire financial advisors, or Robo-advisors or choose to be conservative DIY investors and stick to ETFs and safer mutual funds.
Choose a Broker
Your broker is used to execute orders which is when you buy, sell, and trade stocks. They’re the middleman connecting you to the stock exchanges (NYSE, TSX). Some options for brokers are financial advisors, robot advisors, or a self-managed online broker such as Wealthsimple or Questrade.
Determine the Right Investment Account
Many types of investment accounts exist in Canada and the USA. I won’t go into detail about them all, but I will touch on the most popular options and include links to explore your choices.
In Canada:
·Tax-Free Savings Account (TFSA): An account that allows you to save or invest a defined amount tax-free each year throughout your life.
·Registered Retirement Savings Plan (RRSP): An account designed to reduce the income tax on the money you contribute towards your retirement.
·Registered Education Savings Plan (RESP): A plan that enables you to maximize savings for a child’s education with tax-deferred investment growth and government grants and bonds.
·Registered Retirement Income Fund (RRIF): An account designed to enable you to generate a steady source of income during your retirement.
·Registered Disability Savings Plan (RDSP): A long-term savings plan designed to help those who qualify for the Disability Tax Credit.
Detailed info for American Investors:
Diversify Your Investments
Ever heard of the saying “Don’t keep all your eggs in one basket”? The same can be applied to the stock market and your investments. It’s best to diversify your investments in case the market unexpectedly takes a turn for the worst; If you hold investments in different companies and sectors when one isn’t performing well at least your money is still growing in others. All it takes is one recession to crush a sector, so it’s recommended to diversify. When starting with a smaller amount of money it may be harder to diversify which is another reason I’d suggest investing in ETFs and mutual funds - to minimize risk while still diversifying.
How Do Commissions and Fees Work?
Most brokers charge customers a commission for every trade. These fees can range from $2 to around $10 per trade. Due to commission costs, investors try to limit the total number of trades they make to avoid spending extra money on fees. Exchange-traded funds, carry fees to cover the costs of fund management.
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