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 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, 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, buying, and share issuance of publicly-held entities, take place.
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.
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 to the public in order to raise capital. This is known as initial public offerings (IPO).
As the individual who has acquired a given company’s shares, you can hold the shares you’ve acquired for whichever duration you prefer, in anticipation of dividend payments as well as an increase in the shares’ price.
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.
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 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 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.
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 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.
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.
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 to ensure a more secure financial foundation.
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.
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. 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.
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.
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.
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.
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.
Another useful method to pinpoint companies of interest is tuning in to stock analysis articles and investment commentaries. You must always be critical of what you see, hear, and read, though.
When to Invest in the Stock Market
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.
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. We recommend referring to consensus price targets and analyst reports as means of establishing your range.
You must also pay attention to overvaluation and undervaluation by analyzing a company’s prospects for growth and profit. 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. If we were to give a straightforward explanation, we’d say it’s the classic “buy low, sell high” strategy.
The second strategy is short-selling. It involves borrowing stock shares 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. It’s the distribution of a given company’s profits per share. Typically, dividends are issued quarterly. Sometimes, they’re paid in cash; other times, they’re paid in additional stocks.
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.