When you think of investing, you probably think of stocks. Investing in stocks can be an effective way to grow wealth. Although you always have to be aware of the risks and keep in mind that there are never any guarantees when it comes to investing in stocks. That being said, if you're in a position to handle the risks here's a step by step guide that will get you on your way to investing in stocks.
1. Choose your investing style
There are a couple of ways to go about the stock investing process. You could approach it with a “do it yourself” attitude, where you’re very involved in the investing process. It means you’ll have to do loads of research and work and actually invest in stocks yourself. Alternatively, you could choose to have someone else invest in stocks for you. That could be either a financial advisor or a robo-advisor. Usually, when we talk about investing styles, we’re referring to active versus passive investing.
Active Investing: If you’re actively investing, you’re usually trying to beat the market with your trades. You’ll usually go through a brokerage/trading platform, where you’ll have an investment account and make regular trades yourself. This requires a ton of research and work.
A word of warning: Warren Buffett himself said that he discourages practically everyone from picking individual stocks:
Passive Investing: Passive investing refers to a method in which you buy a chunk of the market and hold onto your investments for a long period of time, and ride out the market’s ups and downs. You’re not trying to beat the market, you’re simply trying to mirror it.
Regardless of how you'll choose to invest - there are advantages to starting early. You could make almost four times more by starting to invest early in life. You know what they say - there's no time like the present.
2. Choose an investment platform or advisor
No matter what you choose to do, you’re going to need an investment platform, or an advisor to make the trade. There are certain things to keep in mind while choosing the right investment platform. Here are your three options.
Trading Platform/Online Brokerage
Online investing takes place on a trading platform, and nowadays there are quite a few to choose from, with different fees or even some that are commission-free. This means you’ll have to research each individual stocks you want to purchase like Apple or Amazon. You’ll probably have to consider how many shares you want, look into the company’s history, past earnings, and its projected earnings. Then be prepared to ensure your portfolio of stocks is sufficiently diversified for you to minimize your risks—i.e. not putting all of your eggs in one basket. You’ll also have to keep an eye on the stock’s performance and decide when and if to sell your shares.
Robo Advisor
If you’re new to the whole stocks game and the idea of single-handedly picking stocks makes you break out in anxiety sweats immediately, there’s always the robo advisor choice. Robo advisors are basically automated investment services that will do the job of wealth managers or investment advisors by using sophisticated algorithms to help you pick stocks and create a portfolio based on your financial goals and your risk tolerance. This is called passive investing, and it is usually advisable for most of us just getting started in the investment game.
Robo advisors usually charge lower fees, since they create portfolios consisting of inexpensive exchange-traded funds (ETFs). Investing in ETFs also has the benefit of lowering your risk, which is often a high barrier of entry for newbie investors. Another advantage? Robo advisors are accessible 24/7, no appointments necessary. And since the companies operate entirely online, you can sign up to a robo advisor, deposit money, check your balance, withdraw money, etc., all from the comfort of your own home.
Financial Planner
A financial planner is the white-glove service of stocks trading, both offline and on. It’s usually the most expensive option but guarantees you’ll get the highest level of service. Simply put, a financial planner is anyone who helps you manage your money, whether that’s a stockbroker, an accountant, or a retirement specialist. The most prudent choice is a Certified Financial Planner™ (CFP®), because they have undergone testing and are legally obligated to place your interests above any other concern and cannot make commissions from managing your assets.
But again, this level of service comes at a price (although some services offer free perks like a portfolio review session). You’ll usually have to pay a flat fee, commission, and perhaps consultation fees and fees priced at the percentage of assets under management. So before you choose this route, it’s important to know exactly how much you’re paying for and whether it’s worth it for you, since fees can really eat into investment gains if you don’t plan carefully.
Feature | Robo-Advisors | Human Financial AdvisorsSelf-Directed/Online Broker | Self-Directed/Online Broker |
|---|---|---|---|
| Fees | Typically below 0.5%. | Typically above 1%. | Low fees, normally per trade. Some offer commission-free trading. |
| Human advice | Often comes with human advice and some access to a financial advisor. Some robo-advisors offer a full financial planning service for high net worth clients. | Offer a full financial plan and can provide advice on your specific situation. | No human advice. |
| Most useful for | A hands-free approach to investing - perfect for people who want help with money management. | Useful for people with a high net worth or complicated tax situation. | A DIY approach, you have to pick your own stocks. It's a cheap, no-frills approach to investing. |
| Fiduciary duty when offering advice (putting your interests ahead of their own) | Fiduciary standards are not mandatory. Only robo-advisors that are registered Portfolio Managers have a fiduciary duty. An CIRO registered robo-advisor has a suitability obligation. This means they are required to follow best practices set by CIRO and have a duty to disclose investing risks to clients. | Fiduciary standards are not mandatary. Only licenced advisors or registered portfolio managers are fuduciaries. | No advice offered. |
Different account providers also offer different kinds of customer service and help, so it would be wise to assess how much assistance you’ll want when setting up and managing your account.
3. Determine your stock buying goals and risk tolerance
Next, you’re going to have to think about what your goals are. Do you want to be an active trader and hold stocks for a short amount of time, or do you want to be in this game for the long term? This is called your time horizon, which will determine how long you’re holding on to stocks for. If you’re saving for something far in the future, like retirement, then your time horizon will be accordingly long.
While evaluating your goals, you’ll also have to keep your risk tolerance in mind. Investing in stocks always carries an inherent level of risk with it, and they have the potential to be volatile in the short term. The stock market will always go up and down, and if you panic when it’s down and sell in a frenzy, then perhaps you’d better go easy on the stocks and focus more on bonds.
4. Choose the right investment account
Once you’ve figured out why and what, it’s time to choose the proper account to hold your stocks. You can usually open different kinds of investment accounts, depending on your financial needs and goals, with brokerages and robo-advisors. Whatever you do, you should definitely compare account minimums, whether the accounts charge commission for trades, and any other fees that might arise. These are some of the most common kinds of investment accounts:
Tax-Free Savings Account (TFSA): A Tax Free Savings Account (TFSA) is a registered investment or savings account that allows for tax free gains. That means that any returns on your investments in that account are tax free when you withdraw them, which you can do at any time.
Retirement Account (RRSP): A Registered Retirement Savings Plan (RRSP) is a retirement account that allows you to invest in stocks, bonds, and other assets. Your contributions are tax-deferred, meaning any money you contribute will be exempt from CRA taxes the year you make the deposit, and will only be taxed years down the line when you withdraw it.
Personal Investing/Brokerage Account: A personal investing account can refer to any kind of account that holds your investments. But if it’s a strictly personal one, that account simply serves for any of your financial goals and doesn’t come with benefits like the government-sponsored ones do.
Registered Education Savings Plan (RESP): RESPs are tax-advantaged accounts designed to help Canadians save for higher education. RESP funds can be invested in countless ways and if they are spent on higher-education related tuition or expenses, no investment gains in the account will be subject to income taxes.
5. Decide how much you want to invest in stocks
Once you’ve decided what platform you want to use, it’s time to know how much money you’re willing to spend and how much you’ll need to start investing. The most successful investors, regardless of their budget, are in it for the long game—that means you’re willing to let your money sit for a minimum of five years, preferably longer. The longer it sits, the more it’ll be protected against losses in the long term, since fluctuations in the market are inevitable but will even out over a long-term average. Your patience will also reap the rewards of compound interest. So no matter your budget, it should be an amount that you’re comfortable with leaving untouched for a significant number of years.
Don’t worry if you can’t afford a share of your favorite company’s stock, which can sometimes cost several thousand dollars—many brokerages require no minimum deposits to open an account, and allow you to purchase ETFs funds that allow you to buy a small piece of many companies so you can get immediate exposure to the stock market.
6. Decide what stocks to invest in
If you feel that you’re familiar with the market and with individual companies, you can simply pick and choose the stocks that you want to invest in and create your own portfolio that way. But for those of us who might not be so sure, or don’t have the time to do some in-depth research on all the companies currently trading on the S&P 500, bundling your portfolio in ETFs is probably the way to go.
Individual Stocks: These are exactly what you think they are: They represent an individual share in a company. In this way, since you’re investing in a specific company, the aim is to get a return on your investment and grow your money.
Index funds: An index fund is a type of fund that aims to mirror a particular market. Index funds contain a tiny piece of all the companies included in a particular market index. When you buy an index fund, you’re buying a small slice of the entire market.
Exchange-Traded Funds: An ETF is a collection of stocks or bonds that may be purchased for one price, and are usually appreciated for being a low-cost alternative to other investment assets. Unlike mutual funds, ETFs may be bought and sold during the entire trading day just like a stocks on an exchange. Many popular ETFs track well-known stock indexes like the S&P 500.
Mutual Funds: A mutual fund is also a collection of stocks, bonds, and other assets that investors can buy into. Unlike the stock market, in which investors purchase shares from one another, mutual fund shares are purchased directly from the fund or a broker who purchases shares for investors. Mutual funds are also usually managed by a fund manager.
Bonds: A bond is a fixed income security in which the investor loans money to the entity who issued the bond. Bonds are issued by corporations, state and local governments, non-profit institutions, and the federal government. They’re usually considered to be lower risk than stocks.
7. Invest in the stocks of your choice
Now that you’ve allocated some funds for investment purposes and decided what your investing style is, it’s time to get started! Before you buy or sell a single stock it’s useful to understand the types of orders that exist. You’ll have the option to choose an order type before you make a trade.
Market order: This is the most common and fastest type of order, which involves you usually going through a brokerage to buy or sell a security at the best available price in the current market.
Limit order: A limit order is an order to buy or sell a stock at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. If the price isn’t reached, then your trade might not be executed.
Stop order: A stop order, also referred to as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order.
Once you know the type of order you want to place, check the latest stock price and then hit the trade button! If you are trading within market hours your trade should go through right away. Congratulations, you are now the proud owner of some stock!
8. Stick to your plan
As mentioned before, no matter what route you choose, the most successful investment strategy might be consistency. It’s especially important to not freak out and change your plan just because the market is suddenly dipping. If you’ve diversified your investments, you’ll probably be well-isolated from these dips and turns. And while a rising stock may be tempting, it can fall just as quickly. In the end, your diversified investments will likely pay off, especially if you play the long game: studies show that historically over time, markets like the S&P 500 tend to level out and return to an average of 7% annual returns. Reinvesting your returns can be extreamly useful thanks to the power of compounding.
Frequently asked questions about stock market investing
When is the best time to start investing in stocks?
The best time to start investing is right now. Before you get started, though, take an honest look at how much debt you have. If you have debt, especially high-interest debt, pay it off before you do anything else. Second, make sure you have an emergency fund, which is about three to six months’ worth of expenses tucked away in a solid savings account. After that, you’re ready to start allocating some funds to the stock market.
How much should I be investing in the stock market?
Most people want to invest in order to build up longterm savings, especially for retirement. If that’s the case, then you should be planning to invest about 10% of your net income. Again, make sure that this isn’t money that you might need in the near future; that’s what your emergency fund is for. When creating a budget for your investments, also keep any government or employer-sponsored retirement plans.
How can I create a diversified portfolio of stocks?
Diversification is having your investing eggs in many baskets rather than one. By having diversified investments, you ensure that you’ll be invested in enough sectors to not be as vulnerable if something goes wrong. So if you really want to invest in real estate, you can, but you won’t be totally dependent on that segment of the market. In the unfortunate case that real estate values tank, your entire portfolio might not be down because you have investments in other areas.
Exchange-traded funds (ETFs) are an example of diversified investments. You can buy ETFs that invest in many stocks and spread your money out across the market. Investing with a robo-advisor allows for much more diversification, since they generally invest in many ETFs.
Is stock trading risky?
There is always a degree of risk involved when trading stocks. The market always has the potential to go up and down, which will affect the value of your investments. Risk is particularly high if you’re investing in trendy industries or companies which are heralded as “the next big thing,” since they don’t have an established market history in order for traders to make an informed decision. At the end of the day, your best strategy is to remain calm, not act in a panic, and plan for market swings.
How do I find out the share price of a company?
You can find the most up-to-date share price of a company on the website of the market on which they’re traded (like the London Stock Exchange or the Toronto Stock Exchange). Sites like Bloomberg also display share prices of traded stocks, and companies inform investors about share price performance on their own websites as well.
What are the opening hours of the stock exchange?
The U.S. & Canadian stock markets including the New York Stock Exchange (NYSE), the Nasdaq Stock Market (Nasdaq) and the Toronto Stock Exchange (TSX) are normally open from 9:30 a.m. to 4 p.m on weekdays. They are closed at weekends and for some public holidays.
Where can I get investment advice?
The Internet is a treasure trove of information, although you should always be sure to check sources and take everything with a grain of salt. If you’re using a financial advisor, they’ll probably be your best bet on getting reliable and sound investment advice. Many brokerage firms also provide articles, videos, and infographics with advice. If you’re going through a robo-advisor, many platforms will offer integrated financial advice with their products, with the added benefit of 24/7 accessibility.
How do you sell stocks?
In order to sell your stock, you have to decide whether you want to execute a market order, a limit order, or a stop order. If you’re using an online trading platform, it’s usually just a matter of a couple of clicks for you to execute your sale. If you’re working with a financial advisor, you usually tell them in person or on the phone about the sale, and they will execute it on your behalf.
What is the 5% rule?
If you’re picking stocks yourself, it’s helpful to follow the 5% rule: This states that proper diversification means that no one investment or sector should account for any more than 5% of an entire investment portfolio. If you’re trading with ETFs, you might very well hold more than 5% of your portfolio in one ETF or mutual fund and still be following the 5% rule because they’re made up of bundled stocks and sectors.
What is value investing?
Value investing, as the name suggests, consists of finding investments that are good value for money. A value investor actively seeks out stocks, bonds or other investments that he or she believes have been undervalued in the market. Value investing is a form of speculation, but instead of chasing after “the next big thing” that will maybe grow enormously in the future, investors look for investments that have shown themselves to be sold under value in the current market.
