6 Tips for Beginner Investors: How To Get Started
Interested in getting involved in the stock market? It can be an overwhelming world for a beginner, but you shouldn’t let that stop you from taking advantage of all the benefits a well-tended portfolio can bring. In that light, we’ve got six tips for those looking to get in the game.
1. Make sure your financial situation is stable
If you’re an absolute beginner with investing, it’s important to assess your current financial situation and determine if it’s really a good time to get involved. If you’ve got a large amount of credit card debt to pay down or have some major financial commitments on the horizon, making investments might not be the most prudent decision. Instead, work towards paying down that debt or meeting your commitments first. You don’t need to be 100% debt-free before you start investing, but it’s in your best interest to minimize it as much as possible to reduce your overall risk levels.
Beyond that, having a well-tended emergency fund before you start investing is recommended by most financial experts. Investing is inherently risky, so it’s important to be prepared in case you need to weather a low period in the market. The Government of Canada recommends that you have an emergency fund equivalent to roughly 3 to 6 months of your income or your expenses, as the two amounts tend to be quite similar for most people..
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2. Invest your windfalls
If you live on somewhat of a tight budget, it can understandably be hard to set money aside for investing. But, if you can afford to do so, consider putting all the windfalls you receive towards your portfolio. A windfall is any one-time sum of money you might receive beyond your regular source/s of income. Examples might include your tax return, gifts and contest or lottery winnings.
This is a great way to stay on budget but still get involved in the stock market (even if it’s just a little bit). There are a ton of companies, such as Wealthsimple, that’ll help you get started with buying and selling stocks without needing hundreds of dollars to spare.
3. Choose long-term investments
Many people get involved in the stock market under the assumption that it’s a great way to get rich quick. However, unless you’re already an expert-level investor (or you get obscenely lucky with your picks), this couldn’t be further from the truth. No one can guarantee that they’ll earn a fortune by trading stocks, and this is particularly true if you’re a beginner trying to do so in a short period of time.
Instead, selecting investments that you intend to keep for years is generally the more favourable option. Taking a long-term approach to investing helps to mitigate the ups and downs the market might experience over time and will help compounding work in your favour.
4. Don’t invest in what you don’t understand
Before getting involved with the stock market, take the time to do some further reading on how the market works and about the various types of securities available to purchase. If possible, go beyond resources on the Internet and find some well-renowned books on investing, like The Intelligent Investor. Gaining a basic level of knowledge about investing, at minimum, is essential to help ensure your success.
Even if you plan on using the services of a financial advisor to help choose your what goes in your portfolio, it’s important that you understand what your money is getting invested in and how the process works. If you don’t know where your money is going, it’s going to be tough to protect yourself from shady activity that might cost you in the end.
Beyond that, to some, the values and mission of the companies they invest in are just as important as the returns. For example, if you place a high priority on making environmentally friendly choices, investing in a mining or fossil fuels company probably isn’t something that makes sense for you. If you want to make investments that align with your personal beliefs, there’ll be an extra impetus on you to do your research before making any purchases.
5. Watch out for fees
As you venture in the world of investing, you’ll find that it’s essentially impossible to avoid paying fees during the process of buying, selling and trading securities. So, while it’s inevitable that you’ll have to pay fees, be mindful of how they can eat up your returns over time. The amount and frequency of these fees will be heavily dependent on the types of services you use, securities you purchase, your investing goals and more, so it’s tough to make a general judgement on what’s “too much”. But, do your best to make a realistic assessment about the level of service you’re receiving for the fees you’re paying.
6. Invest in a registered account
A registered account is a special type of bank account that‘s registered with the government to hold special tax privileges. Some common examples include RRSP’s, TFSA’s and RESP’s. These types of accounts allow the investments held within them to grow tax-free, which can be extremely advantageous when considering long-term investments.
So, if you can afford to do so, hold your investments in a registered account! You’re more likely to benefit from interest compounding if it’s happening in a place where it’s not being hampered by taxes.
