A Guide For Beginners: Investing In Stocks
Given the unprecedented times, people are struggling to make ends meet, let alone meet their short or long-term financial goals. Granted the struggling economy, the shifting job market, the uncertainties of the pandemic, people are conflicted with saving for their future. Particularly, many young adults are finding it difficult to manage their finances, and plan for their future without a means of income. Whether it’s starting a business venture, saving for a wedding, paying for loans, investing in further education, or financing a car, the uncertainty remains. As a result, a recent trend to largely inspire young adults is investing in the stock market. However, the lack of clear guidance and somewhat difficult language has made it difficult for people to understand the mechanics of investing in the stock market. As such, this article will provide a preliminary perspective on investing in stocks, while simultaneously providing a guide for beginners.
What is a Stock?
A stock, also known as equity, is a security that represents the ownership of a fraction of a corporation. This entitles the owner of the stock to a proportion of the corporation's assets and profits, equal to how much stock they own. Units of stock are called "shares." (Hayes, 2020) Stocks are bought and sold predominantly on stock exchanges, though there can be private sales as well, and are the foundation of many individual investors' portfolios. Stocks are a form of security, they represent a small percent of the ownership of a corporation. Investments through stocks have been one most outperformed in history.
What is a Bond?
A bond is much like a loan taken out by a company. A company has the option to get money from the bank, as well as from their investors. The investors are the ones who buy the companies’ bonds, in exchange for the capital, the company then pays an annual interest rate. With the comparison to stocks, bonds can vary depending on their singular documenting qualities; maturity, coupon rate, tax status, and callability. Risks include interest risk, credit/default and prepayment risk. Bonds are a way to earn money and invest long term, for a safer option. Bonds that are not valued at a high price right now may change and develop in the future which is where your investments come into play.
How are Stocks Beneficial to me?
Stocks are beneficial because they help build your investment portfolio. Owning stocks in numerous companies allows you to protect your money from inflation and taxes, build your savings, and maximize income from your investments. A small investment can lead to a bigger outcome in nearly a year; if done right you can grow the money you invest anywhere between 10% per year over the long term. A longer timeframe coupled with the right investments can lead you to double your savings in years. Another benefit includes the growth of stocks throughout time. Over the years and most recently there have been many crashes, pullbacks, and lengths of disturbances. That goes without saying that there has been a steady march upwards with the global economies leading in growth. Another benefit includes the principle of power compounding. As mentioned before, you can invest for a year and wait to see where that takes you, but holding onto investments for longer periods of time can lead to more growth via compounding. Instead of a steady return after a short period, you can wait a while, 30, 40 or even 50 years, and follow your strategy benefiting in a larger sum.
How to Begin Investing:
To buy stocks yourself you must be 18 years old. If you are not of the required age, you can still invest as a minor if your parents or guardians open an account for you. If you are younger than 18 you can start by looking through investment apps, like “Wealthsimple”, and open up a tax-free savings account where you can use to start investing.
Deciding on a Broker
This is the process of finding what app or bank you want to use. The preliminary step in deciding on your platform of choice is understanding how each brokerage aligns with your investing goals, educational needs, and learning style. The way to find the right brokerage is by knowing your needs and identifying what is most important to you based on your investing goals. There is always space to learn and with research comes a sense of awareness to the broker you are investing with. By recognizing your long and short-term goals, you can begin to find a broker which best compliments your needs.
Deciding How Much to Invest
You don’t need to have a significant amount of money to be able to invest. As IBD founder William O'Neil suggests, "[i]f you're a typical working person or a beginning investor, you should know that it doesn't take a lot of money to start,” (as quoted in Gondo, 2021). The fundamental role of investing is starting small and ending with something of equal or greater value. This doesn't mean that when you don't make money off your stock that you should stop, it is a learning curve and a way for you to grow and develop from your mistakes.
Types of Investment Accounts
You need to make sure to have an investment account that follows what you want to hold in your account. For instance, a common example used is; an investment account is like a vehicle, your actual investments are the passengers (Farrington, 2019). Inside your account, you have a choice of how much of each investment you would like to hold in your account, such as stocks, bonds, mutual funds etc. Certain accounts have limits and drawbacks that determine the type of investments a particular account may hold.
The two main differences in accounts are brokerage and retirement. Brokerage accounts can be accessed at any time to deposit or withdraw funds, while retirement accounts limit you to how much you can invest and the funds which you can usually only withdraw when you retire. Now the question lies in which account should you buy. There are many different accounts out there but here's a simplified choice. If you are looking to just start investing and plan on leaving your investments until retirement, then consider the retirement account. This account offers many tax benefits and is for long-term investment strategies. If you are a beginner looking to experiment and take part in the stock market, the more sensible choice would be to use any tax-sheltered account which is widely offered in Canada. This allows you to take more control of your investments while also giving you the flexibility to withdraw money in the future.
Long-term vs. Short-term Investments
Deciding on whether you want to invest long-term or short-term is a key decision in determining your financial goals. Long-term investments are more commonly used for investments over longer periods of time. Essentially, they allow growth and opportunity over time, they can help pay off a mortgage, college loans, retirement and offer much more help with future expenses. Short-term investments are typically used for smaller financial goals within a shorter period of time. Situations in which you may need a short-term investment include, saving money for mortgage, bills, further education, etc.
As Warren Buffet comments, “[m]ost people get interested in stocks when everyone else is. The time to get started is when no one else is. You can’t buy what is popular and do well.”
There is no better time to start than now. Before fully entering the stock market realm, take your time to research and understand the finer mechanics of various investment vehicles so you’re fully confident with putting money towards them. Like any other financial initiative, investment is also a risk. But it is definitely one that-if done right-can be greatly beneficial in the long run.
“Key Benefits of Investing In Stocks.” www6.Royalbank.com, www6.royalbank.com/en/di/hubs/investing-academy/chapter/key-benefits-of-investing-in-stocks/jv7atg13/jv7atg1j#:~:text=Stocks%20can%20be%20a%20valuable,investing%20in%20the%20stock%20market.
Todd Lincoln, MBA. “15 Powerful Reasons Why You Should Invest in the Stock Market.” Medium, Investor's Handbook, 30 Jan. 2021, medium.com/the-post-grad-survival-guide/15-powerful-reasons-why-you-should-invest-in-the-stock-market-b1c155370313.
Rexaline, Shanthi. “How Old Do You Have to Be to Buy Stocks?” Benzinga, 5 Nov. 2020, www.benzinga.com/money/how-old-do-you-have-to-be-to-invest-in-stocks/.
Gondo, Nancy. “How Much Money Do You Need To Start Investing In Stocks?” Investor's Business Daily, 5 Jan. 2021, www.investors.com/how-to-invest/investors-corner/how-much-money-do-you-need-to-start-investing/.
Yochim, Dayana. “4 Types of Investment Accounts You Should Know.” NerdWallet, 19 Nov. 2020, www.nerdwallet.com/article/investing/types-investment-accounts-know.
https://www.youtube.com/watch?v=D7c2hLdjK5g-investing for beginners in Canada
Benefits of Long-Term Investing, www.calcxml.com/do/article?id=-6630033&cat=saving#:~:text=The%20advantage%20of%20long%2Dterm,to%20weather%20low%20market%20periods.