The Stock Market Guide to Investing for Beginners
Investing for Beginners 101. If you are not investing in the stock market then you are missing out! Stop putting up with the bank’s interest rate and use your savings for something greater. I will teach you everything you need to know to get started in the stock market so you can start earning another stream of income to help pay your bills.
UPDATE 06/2019: I ADDED NEW CONTENT TO THIS BLOG POST TO KEEP IT UP TO DATE.
Without further ado, investing for beginners 101. In this blog post, you will learn:
- Why you should be investing in the stock market.
- Things To Know Before Investing In The Stock Market.
- Investing for Beginners: Getting Started.
- Summary List of things that I’ve learned.
- My Investment Strategy.
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1. Why Should You Be Investing In The Stock Market
Like I mentioned at the beginning of this blog post, if you are not investing in the stock market then you are missing out because there are many great benefits that outweigh the cost of investing.
- Good potential returns
- The returns will battle against Inflation
- Two new income streams
#1. Good Potential Returns
Investing in the stock market can easily earn you a lot more than your basic savings account at a bank.
Remember that banks are a business; they are more than just a company that holds your money. If you want more than 0.05% interest then you need to be willing to take on more risks. It is not unusual to earn at least 1-8% on your investments. Achieving more than 20% is possible, but for a passive and new investor, 20% is considered excellent.
If risks make you uncomfortable then you can always:
- ask your bank to up the tier of your savings account.
- transition to an online bank/credit union.
- purchase financial instruments such as Guaranteed Investment Certificates/Term Deposits.
- 5 Ways To Earn More Interest on Your Savings Account.
- Bank here to Earn More Interest On Your Savings.
#2. The returns will battle against inflation
According to statistic pages, the inflation rate averages around 1-3% every year (In Canada).
That means if you’re not making at least 1-3% in interest, then you’re in a way “losing money” because the buying power of your money in the future will not be as powerful as it is now.
Investing can be a good method to help you prevent any losses from inflation because 1-3% is a return that can be easily achieved. A lot of the most popular Index Funds are averaged to give an 8% return.
#3. Two new income streams
Investing in the stock market will open two streams of income through capital appreciation and dividends.
- Capital appreciation is when you buy a share at a point in time and sell it later at a higher cost. The difference that you earn (if positive) is called a “capital gain”, whereas a negative difference is called a “capital loss”.
- Dividends, on the other hand, is when you receive money for holding onto a share of a particular company. Keep in mind that not all companies pay dividends and it varies between each company.
Check out these links to learn more about dividends:
- What are Dividends and Everything You Need To Know About It
- Don’t Fall Prey to The Dividend Yield! Read This Before Investing for Dividends
2. Things to know before Investing
Now, before I go on any further, I want to mention to you that I am not a financial advisor and I recommend you to do your proper research before placing your money on the market. I can’t be held liable if your investments go south.
I know, investing sounds scary. Putting your money into the market and having a chance to lose all of it can make a person’s heart skip a beat. But just know,
- You will not lose all of your money overnight and you can’t expect to get rich overnight.
- Investing and gambling is a game of chance IF you don’t know what you’re doing. The more experience and technical you get, the more likely it will become a strategy game. Sure… you can’t predict how the market will turn out or guess what cards will be drawn from the deck, but if you learn to read the signals and reposition yourself then you can turn it from a game of chance to a game of skill.
2.1) Be Patient When It Comes to Investing
Investing in the stock market is not a get-rich-quick scheme. Unless you have loads of money ready to be deposited, you won’t be able to quit your full-time job just yet.
Many people have this expectation that they can make a couple of thousand dollars in a span of a few weeks, and that is totally unrealistic. Investing is a long-term plan that takes into account market fluctuations, strategies, and most importantly, time.
In the same way, you won’t lose your whole investment overnight, you can’t expect to get rich overnight. In most cases, your investments will gradually go up or go down.
2.2) It’s never too late to start, but the sooner, the better.
You don’t need to have a financial advisor to invest in the stock market and you definitely don’t need a degree in finance. I wouldn’t say investing is easy, but with the power of the internet, you can learn how to invest through Youtube. Some Youtubers that I watch are Ryan Scribner and Phil Town’s Rule #1 Investing.
Many people hold off on investing because the time isn’t right. They have bills to pay, obligations to attend to, or simply don’t have enough money. Well here’s the thing, you don’t need a lot to start and it’s better to start now in order to take advantage of time and the compound effect. The longer you procrastinate, the less likely you will get around to it.
Set some money aside! It doesn’t have to be a lot– just small amounts every month. It may not seem like a lot, but the power of compounding will make a big difference. Don’t believe me? Use this investment calculator. Set aside $100 a month, invest into an index fund (averages around 8%) and see how much it will grow after X amount of years.
Should you pay off debt or invest in the stock market? You can read my blog post here on whether you should invest or pay off debt. To help you decide which is the better option.
2.3) Invest in the stock market with training wheels
Putting your money in the stock market is a big financial jump for many people, which is why I highly recommend for you to practice with a free app where you can “virtually” invest in the stock market. This virtual market does not require you to use real money and it reinacts as if it was real life. Like Monopoly. Practice with this until you’re comfortable with how the market works before investing real money.
It’s a great way to maneuver your way around the stock market, but because there isn’t actual money on the line, you won’t be able to determine how strong your risk tolerance really.
2.4) Sign up for an online brokerage account
The trading cost per trade of an online broker is significantly cheaper than a regular bank. My bank charged me $10 per transaction whereas some online accounts charge only a dollar. If you’re only going to trade once in a while then perhaps you can get away with the $10 transaction fee, but if daily trading is your thing then consider ditching your bank and find an online trading account.
I have researched and found the Top 5 Online brokerage accounts for you to try:
3. Investing for Beginners: Getting Started
In this section, you will learn:
- DIfference between TFSA, RRSP, and Unregistered Account.
- How to pick a stock
- Different Types of Orders
3.1) Difference between TFSA, RRSP, and Unregistered Account.
Depending on your goals, one account may provide more benefit to you over the other. Below you will see the pros and cons of each account and you can decide for yourself which will be better suited for your financial goals.
These accounts are best suited to hold investments (bonds, stocks, ETF, mutual funds) instead of just cash.
Tax Free Savings Account (TFSA):
- Can be withdrawn at anytime
- Withdrawals are not taxed
- Interest, dividends, or capital gains on investments are not taxed.
- No Expiry date of Account
- Can Contribute as soon as you turn 18
- Unused contribution room is carried forward
- No tax deduction for contributions
- 1% penalty per month for every dollar over your limit
- New contribution amount is added on every year. 2019: $6000.
- Use this calculator to see how much Contribution room you have
- The contribution room on any withdrawals will be lost in the current year and added back into next year.
- Let’s say you have only $1000 left to contribute in 2019. You invested $1000 but later decided to withdraw it within the same year. In 2020 you will regain the contribution room of $1000 that you withdrew.
Registered Retirement Savings Plan (RRSP):
- Interest, dividends, or capital gains are not taxed until you withdraw.
- Contribution room each year is 18% of earned income up to $26,500 for 2019.
- Tax-deferral contribution
- Unused contribution room is carried forward
- $2000 over-contribution cushion: You can overcontribute $2000 over your allowable limit without being penalized (1% for every dollar over the limit per month). The $2000 contribution cannot be tax-deferred.
- Provides Income tax strategies (more info below)
- Contributions are taxed once you withdraw it
- Can’t withdraw amounts in your RRSP without penalty, unless you are withdrawing it for Life-Long Learning Plan or Home Buyer’s Plan
- RRSP will collapse into an RRIF when you turn 71.
- 1% charge on every dollar over your allowable contribution limit per month.
RRSP Tax Strategies
Your contributions in your RRSP provides you the ability to take advantage of the tax-deferral strategy. Our tax system is based on a “progressive-tax” manner. You can read my blog post on this topic to learn more about what is a progressive tax system. There are two strategies that you can implement with the RRSP.
- Strategy #1. If your income at year end is above the borderline of the next tax bracket then you can report your RRSP contribution against your income to push you back into the lower tax bracket. This means that you will no longer be in the higher tax bracket so, you will only pay tax at the lower tax percentage.
- Strategy #2. RRSP contributions are not required to be reported in the same year of the contribution. There are scenarios where it would make more sense to report the contribution at a later time. For example: If you can foresee that next year your income will be significantly higher then you can report this amount next year to reduce your income when it’s at its highest.
These are the differences between an RRSP and a TFSA. Unregistered accounts are preferably used after all contributions have been used up on both the RRSP and TFSA. It is best to max out the contributions on these two registered accounts before opening an unregistered account.
Unregistered accounts do have the benefit of having no contribution/withdraw limits and the account will not be collapsed after 71. The downside of unregistered accounts is the lack of benefits like the RRSP and TFSA provides.
How To Choose The Right Stocks
DISCLAIMER: The stock market is highly unpredictable and there’s no strategy that will make you rich overnight. You can follow everything that an expert does and yet you won’t be able to quit your job just from investing in the stock market.
You should only invest into something that you understand and support. Do you know how the company operates? What they do? What do they sell? Their intentions and values? Their morals?
If you like their product/service and support everything they stand for then that is a good ground to consider before looking into their financial statements. There’s too much to cover as to what to look for when it comes to their financial statements, so stick around for my other investing blog posts!
Investing for Growth and Dividends
Investing in the stock market will provide investors two new streams of income; through capital appreciation and dividends.
Are stocks primarily focused on improving and developing as a company. In order to do this, developing requires a lot of investment and money to fund their business. Which is why companies like Alphabet Inc. and Amazon have yet to pay dividends because all of the earnings are being used for other needs.
- PRO: Greater earning potential if you invest in a company that develops really well in the future.
- CON: You don’t make a gain/loss until you sell your shares. Your shares can be up 20% and the next thing you know, your shares will be down 10% the following month.
Companies that are stabilized in their growth are more likely to pay out dividends to their shareholders in order to please them. Dividend-paying companies are still able to grow but at a less volatile and less dynamic rate.
- PRO: You earn payments through dividends that can be used to be reinvested (DRIP) or withdrawn. You don’t need to sell your shares. Dividends are considered to be a slow and steady growth to wealth.
- CON: Most companies will pay about 1-5% in dividends, with the riskier companies paying upwards to 10%. Not all companies pay dividends in a quarter.
It’s good to have both, but growth stocks are good for anyone who has a long time horizon and are willing to hang on for good results. Whereas dividends are for anyone who prefers having slow and steady payments and less risk.
To learn more about dividend stocks and if they are right for you then check out my blog post on dividends:
Different Types of Orders
Orders are instructions to your broker to execute a buy or sell of a share. There are different types of orders that you should know before buying your first stock.
- Market Order: These orders are made to be completed at the next available price by the end of the day. It will buy your shares at whatever the price is at the moment of the working day.
- Limit Order: The order will only be executed at or below a specified price. This will prevent you from paying more than you intended to.
- Stop Order: An order to execute the sale of a share once the price hits a specified price. This can help prevent any losses or any loss of potential gain.
5. My Investing Tips for Beginners Summary
- Don’t check on your stocks every day! If you’re investing for the long term then there’s no need to check every day.
- Profiting too much. Don’t be greedy. Sometimes it’s good to cash out at 20-30% capital appreciation and reinvest those gains when the market is low. It’s easier to gain 30% 3 times than to gain 90% once.
- Keep an eye on the market news. I use MarketWatch for the daily updates of any news that may affect my investments. You can’t always predict how the market will turn out, but keeping up to date with the world news can help you predict or plan your next moves.
- Don’t follow the herd. Always think for yourself and never give into biased influences. Just because your best buddy told you to invest in Amazon doesn’t mean that you have to. It’s your money.
- Diversification. Don’t put all your eggs in 1 basket, but also don’t disperse it among too many (unless you can keep track of everything).
- Buy low, sell high. Many people love to buy in on stocks when the price goes up because they have the fear of missing out, and they sell when the price drops in order to avoid losing. However, an experienced investor would see it the other way around. When the price drops, they buy (buying on sale), and when the price increases they sell (cash out the profit).
- Be Careful of Initial Public Offers: IPOs are stocks that started selling on the stock market to investors. These Stocks are still new and have no history of any results. The prices on this IPO stocks will be low, but you can’t predict how well they will perform.
6. My Investment Strategy
I don’t have a unique killer strategy that will make you rich. In fact, I wouldn’t even call what I do a strategy. I simply invest into the bigger companies that are popular and known for drastic change (Growth Stocks). The companies I invest into are the ones that have potential to develop (Nvidia, Amazon, Google). These stocks are ones who barely pay dividends and I am okay with that since I am not looking for loose change in my pocket: I’m looking for massive growth in capital appreciation. I am in my twenties and I expect these companies will develop even more sometime within the next 40 years.
My other investments are in index funds and dividend-paying stocks. The capital appreciation is not as great, but it’s nice having a flow of income come in every quarterly. I don’t withdraw these dividends, but instead, reinvest them through DRIP and having it snowball over time.
I hope these tips for investing for beginners has helped you and provided you with the confidence to invest. Always do your proper research before taking the big step and always hang in tight. You can’t predict how the market will turn out, but if you’re investing in the right company then it will eventually bring you a return.