Stock Market Investing for Beginners | Essentials to Start Investing Successfully

December 18, 2021 | Editorial Team

If you’re looking for a means to secure your financial future and you’re considering stock market investing, this guide, aptly titled “stock market investing for beginners: essentials to start investing successfully,” is for you.

In this guide, we cover everything you need to know in order to start investing wisely in the stock market (see also ‘Canada Tire Stock‘) and have your money work for you while you’re going about your day-to-day life.

From the basic definition of the stock exchange market and how it works to when to invest in it and how to choose the right stocks (see best energy stocks Canada or Air Canada stocks predictions here), we’re going to leave no stone unturned. So, stick around!

What Is the Stock Market?

Learning the fundamentals of stock market investing for beginners starts by knowing what the stock exchange market is.

In short, it’s a medium through which financial activities, such as selling – see ‘How Soon Can You Sell Stock After Buying It?‘ – buying, and share issuance of publicly-held entities, take place. On a related note, see this post explaining what a common stock is as a type of stock investment.

The financial activities around which the stock exchange market revolves are conducted through over-the-counter marketplaces that operate under well-defined regulations. They’re also conducted through institutionalized formal exchanges.

Our recommendation:

The stock market isn’t limited to a particular trading venue or convention. In fact, a single country or region can have more than one stock trading venue. So, no matter where you are in the world, you can begin investing in the stock exchange market.

Being a primary market, the stock trading market enables publicly-held companies to issue and sell some or even all of their shares (see ‘Best Preferred Shares Canada‘) to the public in order to raise capital. This is known as initial public offerings (IPO). Also, if the company wants to issue its shares to the public, it should follow certain guidelines and procedures as explained in our ‘What Happens When a Company Issues New Shares?‘ post.

As the individual who has acquired a given company’s shares (see ‘How to Become a Stockholder‘ and ‘What Is Common Equity?‘), you can hold the shares you’ve acquired for whichever duration you prefer, in anticipation of an increase in the shares’ price and dividend payments (see also ‘Best Dividend ETF Canada‘). Dividend payments are, alongside stock buybacks, a common method for a company to pay its investors.

How to Invest in the Stock Market

There are quite a few ways you can go about investing in the stock market. To simplify the process for you, we’ve listed three invaluable tips that any aspiring stock market investor ought to follow (see also ‘How Often Should I Check My Stocks?‘).

1. Decide on an Investing Approach

There are three main approaches to investing in the stock exchange market. The first approach is the hands-on approach, which entails relying on yourself when it comes to selecting stocks (see ‘Canada Nickel Stock‘ and ‘Best Silver Stocks‘ ) and stock funds.

The second approach entails hiring an expert or an independent management service, like a robo-advisor, to manage the selection of stocks (see ‘Power Corporation of Canada Stock‘) and stock funds on your behalf.

The third and final approach entails investing in your employer’s 401(k). This is arguably the best approach you can take as a beginning investor, as it’ll teach you to make minute contributions and focus on long-term investments. On another note, if you are looking for a short-term investment, the holiday seasons are expected to generate massive profits as explained in ‘Best Stocks to Buy Before Christmas‘ post.

Investing in your employer’s 401(k) can grant you access to a selection of mutual funds. Note, however, that 401(k)s don’t offer access to individual stocks.

2. Set an Appropriate Budget

Investing wisely and successfully in the stock market requires you to analyze the different investment share prices, which can range from a single dollar up to a few thousand dollars, and set a reasonable budget based on your analysis.

If you favour mutual funds (see also options trade) over individual funds and you’re limited by a tight budget, we strongly recommend that you consider exchange-traded funds (ETFs). The thing about ETFs is that even though they have +$1,000 minimums, they trade like stocks, which basically means that you can buy them for a standard share price (see ‘Best Energy ETF Canada‘ and ‘Best Canadian Bank ETF‘).

If you choose to invest through funds, feel free to allocate a significant portion of your financial portfolio. Generally speaking, the longer your time horizon is, the more of your investment portfolio you can allocate (see also ‘Bond ETF Canada‘, your portfolio building guide).

Individual funds, on the other hand, are the complete opposite. If you’re looking to invest in individual funds, it’s advised that you make a small investment – see ‘Best Penny Stock Canada‘ – to ensure a more secure financial foundation.

Lastly, check out our ‘What Is Option Trading in Stock Market?‘ post to see what other asset class offers advantages that ETFs and trading stocks alone cannot.

3. Choose an Investing Account

To begin your stock exchange endeavours, you’re going to need an investment account. You have two options to choose from: a brokerage account or a robo-advisor account.

If you prefer the hands-on approach, a brokerage account would be your best bet. Having an online brokerage account will allow you to buy stocks quickly and with the most minor expenses. A brokerage account will also enable you to buy funds and other types of investments and securities. Brokerage platforms have also introduced other conveniences as explained in our ‘Can I Sell Stocks on the Weekend?‘ post.

If you’re going to opt for the brokerage account option, you’ve got the option to choose an individual retirement account (IRA) or a taxable brokerage account (see also ‘Taxes on Stock Gains Canada‘). The latter option is suitable for someone who’s already saving for retirement in a 401(k) or any other type of retirement plan.

If you’re not so hands-on and you prefer a bit of help, a robo-advisor account is right up your alley. In short, a robo-advisor account will offer you all of the benefits of stock investing without having you do any of the choosing.

Robo-advisor accounts are backed by automated investment management services. These services are intended to help you build a portfolio that suits your investing endeavors – if you ask any Canadian investor about building a beginner portfolio, the most common recommendation you’ll receive is Canadian bank stocks (see CIBC stocks).

Why opt for an automated service when you can opt for a human investment manager? Well, because the former option is much cheaper than the latter. In fact, robo-advisor services charge around 0.25% of the balance in your account.

stock exchange charts on the screen

You’re now ready to start investing!

How to Choose the Right Stock Market

Before you start buying stocks, you must first decide on the financial goals you’re looking to achieve. Blindly buying stocks is never a smart move. Instead, you need to set goals for your portfolio and stick to them – find out which are the best Canadian stocks in the long term (see also ‘Is Air Canada a Good Stock to Buy?’, ‘Maple Leaf Foods Stock‘, or ‘Rogers Stocks‘).

Further, you must stay in tune with daily news, popular events, and emerging trends, as they’re the motor that drives the economy. Research is fundamental when it comes to buying and selling stocks (check out ‘How to Buy Tesla Stock in Canada‘).

The next step is to identify the companies in which you’re looking to invest like, for example, the communications market’s 5G stocks. There are a few ways you can do that. For instance, you can use exchange-traded funds to track the performance of the industry of your preference and start picking winners (see ‘Real estate ETF Canada‘).

You can also use a screener to filter certain stocks based on predetermined criteria. Screeners are the best tools to offer you tons of filtration options and invaluable tips on building a list. You can filter different companies based on vital investment metrics such as dividend yield and market cap – see best small cap stocks here.

Another useful method to pinpoint companies of interest is tuning in to stock analysis articles (see ‘Fundamental vs Technical Analysis‘) and investment commentaries. You must always be critical of what you see, hear, and read, though.

When to Invest in the Stock Market

a man standing in front of the computer monitor and using phone

When it comes to buying and selling stocks, timing is everything – see the Canadian stocks to buy now!

Historically speaking, any period that follows a crash or correction is one with a lot of bargain prices (see ‘How to Take Advantage of Stock Market Crash‘).

When in the market for stocks, establishing a range of stock price targets is more reasonable than going in with a single target in mind (see ‘How to Find Undervalued Stocks‘). We recommend referring to consensus price targets and analyst reports as means of establishing your range. Among other things, new investors should also be encouraged to learn how to read stock markets reports, as well.

You must also pay attention to overvaluation and undervaluation by analyzing a company’s prospects for growth and profit (see also ‘Blue Chip Stocks Canada‘). A reliable method that you can resort to in this case is the discounted cash flow analysis.

Having bought a stock, you need to be patient and wait for it to trade up to its true potential or value. Don’t rely on analyst projections, as they’re merely near-future guesses.

How Does One Make Money?

There are three ways to make money in the stock exchange market. The first way is by selling stock shares at a profit (see also ‘When You Sell Stocks, Who Buys Them?‘ post). If we were to give a straightforward explanation, we’d say it’s the classic “buy low, sell high” strategy. Nonetheless, the stock market has its risks and you may end up with a negative value in your account (see ‘Can You Owe Money on Stocks?‘).

The second strategy is short-selling (see ‘What Does Closed Position Mean in Stocks?‘). It involves borrowing stock shares (see ‘Stock vs Share‘) and selling them on an open market. Then, you repurchase them when the price drops and return the shares to the lender, keeping the profit you made. This strategy is ideal if you know that a stock’s value will decline.

The third strategy is collecting dividends (see also ‘Eligible vs Non-Eligible Dividends‘). It’s the distribution of a given company’s profits per share (see also ‘What Does Liquid Net Worth Mean?‘). Typically, dividends -see also ‘Dividend Tax Credit Canada‘ – are issued quarterly. Sometimes, they’re paid in cash; other times, they’re paid in additional stocks. On a related note, see what happens to stock when a company is bought?

Stock market trading app on a tablet display

If you’re new to stock market investing, you may want to stick to the third strategy until you’ve gained enough experience to start dabbling with the first two strategies.

The Bottom Line

Investing in the stock exchange market is one of the most easily accessible ways to earmark money for a better future, financially speaking. It’s a process that involves the selling, owning, and diversifying of stocks with the expectation of acquiring profit/income. This process comes with risks, though. So, it’s best to do your homework and research every step you intend to take to minimize your losses and increase your profit.