Seven steps to owning shares
One of the ways that savvy investors grow their wealth is by investing in stocks.
Stocks – sometimes called shares or equities – allow you to own an interest in the company that you invest in. You can then claim some of its profits, or assets, in the form of dividends. You might also be able to vote at its shareholder meetings, which can be important if you want to influence its strategic direction, too..
When you sell your shares, you get a capital gain if you earn money from it or must declare a loss if you lose money. While stocks are the riskiest investments, if you buy, and hold, them for the long-term, they usually produce the highest return.
So, what do you need to know to get into this game? Here are seven steps to start
- Decide what kind of investor you are: Before you start investing, you need to decide if you are:
- an active investor: Some like to be very involved in their investments, so want to do it themselves. That means setting your own goals, finding the right stocks to meet those, and buying them through an online broker. All that takes a lot of time and knowledge to do the research and know when to buy and sell. If you’re good at it, you can make a lot of money. If you’re bad, you can lose a lot.
- a passive investor: Others prefer to step back and let the professionals manage their money. If that’s you, the pros can help you define your goals and reach them, and save you a lot of time…and money.
- Figure out how much you can invest: You can buy shares for as little as $10, but that limits your options because you won’t be able to buy enough to diversify and some stock shares and mutual funds have minimum investments. It may also not be worth the fees and commissions, though you can invest in a low-cost index fund or exchange-traded fund (ETF) to diversity at a lower price, since those usually don’t have minimum investments. Realistically, you should probably have at least $1,000, but work with your advisor to see what you should invest as you also ensure that you meet all of your other financial goals.
- Open an online brokerage account: Investors who buy stocks directly from a broker are called “self-directed”. You must research your own stocks before you pick them and decide how you want to allocate, and diversify, the assets in your investment portfolio. Canadian online brokerage platforms vary from independent discount brokers to the bank-owned brokerage firms. Check which style works best for you.
- Choose an investment account: In Canada, you can use either a registered or non-registered account. There are:
- Tax-free Savings Accounts (TFSA) allow you, if you are 18 or over, to invest and earn tax-free returns on it. You can use this account to save for your short or long-term goals, including retirement. It has an annual contribution limit, which is $6,000 for 2022.
- Registered Retirement Savings Plans (RRSP) allow you to save for retirement and defer the taxes on your earnings until you withdraw the money. You can contribute 18% of last year’s income, up to a maximum, which is $29,210 in 2022.
- Registered Education Savings Plans (RESP) allows you to save for your child’s post-secondary education. The government will also match your savings up to $7,200 to add to the fund.
- You can also invest your stocks in a non-registered account for personal or business purposes.
- Learn some stock market terminology: Stock investing has its own world, but you can learn the terminology. Spend some time online to see what you need to know for the level that you’re at. It will be more if you do it yourself.
- Fund your account: You can:
- pick individual stocks, or
- choose baskets of stocks:
- a mutual fund, which is a collection of stocks, bonds, or other assets packaged under one price. They allow you to pool your money and buy many stocks, which you couldn’t buy on your own. A financial professional generally “actively” manages these, so there can be higher fees.
- an index fund, which provides you with a basket of investments for one price, just like mutual funds. This fund tracks an index, like the Toronto Stock Exchange (TSX) or Standard & Poor’s (S&P) 500. It usually has lower fees since you aren’t paying for a financial pro.
- exchange-traded funds (ETFs), which -also allow you to invest in several companies, industries, or sectors at an affordable price. Like index funds, they usually track an index rather than a fund manager’s strategy. But, like stocks, you can trade them on an exchange during the day. (Mutuals and index funds can’t be traded until the market closes). You must pay a commission, but it’s often lower than the other options.
- Analyse and strategize how you will diversify: Once you decide the kind of account you want, you need to do your research to buy a stock. Are you looking for growth – or value? Either way, you need to analyze the company’s financial health, value, potential growth, management, industry ranking, and other factors. Research what’s important for the area you’re choosing. If you want the full experience, you can also do as the traders do: analyze its historical price patterns to try to forecast a stock’s future price. Or you can just work with a broker, who will make all of that much easier for you.