Investors have always liked stocks because they have the power to transform a portfolio. Buying, selling and trading stocks (also known as shares or equities) is the foundation of the investing world. You can buy shares of public companies — individually or through the purchase of mutual funds or Exchange-Traded funds (ETFs) — with the potential benefit of seeing your investments rise over time. With share ownership, your financial outlook can be transformed compared to simply saving cash or holding other fixed income investments like Guaranteed Investment Certificates (GICs).
But, to borrow an oft-quoted line from Spider-Man, “with great power comes great responsibility.” The stock market has a long history of rising over time, but it’s also hit bumps along the way. Some companies have gone to the moon while others have gone bankrupt, rendering their stocks worthless.
With the right strategies, equities have the potential to boost your portfolio’s returns. If you want stocks to be the superhero in your story, you need to start by understanding how to choose companies that may be appropriate for your investment goals, and how comfortable you are with risk.
Key considerations before investing in stocks
Before you jump in and start buying stocks, it can be important to do a little homework — and not just on the companies you want to invest in. To be a successful investor, it can help to have a solid understanding of the type of investor you want to be.
Identify your risk tolerance
The word “risk” might conjure up images of people jumping out of airplanes or juggling knives, but everything we do has some level of risk. Asking your crush out on a date, booking a standby seat when travelling, ordering escargot just because — each of these acts also represents a form of risk. It’s just that they have less severe consequences if something doesn’t go your way. Your tolerance for investment risk works in a similar way. Would you be crushed if your investment was worth 20% or even 40% less in a year? Can you stomach any loss at all? Your answers can help determine whether you should invest in stocks, how much of your portfolio should be dedicated to stocks, what kinds of stocks to buy and how you should hold them going forward.
Determine your investment goals
Your risk tolerance will steer you away from certain types of investments, but you’ll also want to consider your goals when building out your portfolio. For instance, if you’re starting early in your career to save for retirement, you may be able to afford taking more risk for the chance of higher returns. After all, you’ll have time to recover from any losses. But as your retirement date gets closer, wealth preservation can become a greater priority, which may steer you toward safer assets like Guaranteed Investment Certificates (GICs) and fixed income. The same logic applies if you are investing for shorter time horizons, like a child’s education, a down payment on a house or a dream vacation. The shorter your investment timeframe, the less risk you may want to take.
Consider your budget and costs
How are you going to fund your investment account? By setting aside a small sum from your paycheque every month? With an inheritance? Whenever money becomes available? Your answer to those questions could influence how you approach the stock market.
If you are beginning with a small amount to invest, you might consider an Exchange Traded Fund (ETF) or a mutual fund because each unit of a mutual fund or ETF represents a bundle of stocks rather than one single company. This can give you a simple way to build a diversified portfolio. As you grow your wealth — and your investment expertise — you might consider purchasing stock in individual companies.
Of course, there is nothing preventing you from owning individual companies right from the start, but doing so may raise your costs, which can eat into your returns: Brokerages charge you commissions to make trades, fund companies charge management fees and advisors charge portfolio management fees. The benefits of having your portfolio managed should be weighed against the fees you could pay. For this reason, small investors may want to aim for low-cost investing vehicles when establishing an investing habit.
Think about your investing strategy
There are many ways to invest. You can take a hands-on approach and try to beat the market (active investing), or you can go with a more laid-back method that may not beat the market but seeks to keep pace with it (passive investing). Both approaches have advantages and drawbacks. Here is a closer look at the differences between active and passive investing strategies.
This type of investing is a method of picking certain stocks and making trades you think will help you achieve your investment goals. If you want to build a portfolio that aims to outperform the market, then you could follow a strategy of actively managing your investments or find a product that can do that for you. Just be aware that millions of other investors like you, with varying levels of expertise, are trying to do the same thing and the risk of losing some of your investment is always present.
This type of investing uses a method of buying “index funds” that own all the stocks in a particular market index, such as the S&P 500 or the S&P/TSX Composite. These funds don’t typically try to beat the performance of the stock market, only match it. Because they do not require active managers, these funds typically have low management fees. Given their fee structure and diversified nature, index funds seek to provide more stable appreciation over the long term when compared to individual stock selection.
Access tax benefits by investing with a registered account
Any gains you earn from your investments, like dividends and capital gains, can be subject to tax — but there are exceptions. There are a handful of registered accounts in Canada that allow you to defer, reduce or even eliminate the taxes you pay on investment gains. All registered accounts allow your investments to grow tax-sheltered, but accounts like the Registered Retirement Savings Plan (RRSP) will tax your withdrawals as income, while others like the Tax-Free Savings Account (TFSA) will let you take money out completely tax free. You can learn more about the different registered account types here.
Brokerages and investment management companies offer a range of these tax-advantaged accounts, usually without any additional fees. There are restrictions, however, on how much you can contribute to and withdraw from registered accounts, as well as when you can do so. Overall, accounts like RRSPs and TFSAs are key tools that can help people grow their wealth — even those who are just beginning.
Research your investments and diversify to limit your risk
There are two key ways to reduce your portfolio risks: know what you’re buying and diversify your holdings.
To help ensure you know what you’re buying, you can become familiar with a variety of investment-specific details. For example, you may familiarize yourself with the company’s financial metrics, history, competitive landscape, market sector and more. It may sound intimidating, but it’s not as complicated as you think. With a little effort, you too can be researching stocks like a pro.
Diversification means owning a variety of holdings with different characteristics. Owning stocks operating in different industries and different countries is one way to do this. This way, if something bad happens to one stock, the rest of your portfolio may be unaffected. By investing in an index ETF, you may be automatically diversified — at least within the market it covers.
Choose a platform to buy stocks in Canada
While you can seek outside help to manage your portfolio, many Canadians are opting for the convenience of managing their own investments. With a TD Direct Investing account, you have the tools you need to invest in mutual funds, ETFs and individual stocks. If you’re not sure you’re ready to manage your own portfolio, there are other options:
- Robo-advisor — Robo-advisors are low-cost platforms that use algorithms to create a customized portfolio (usually of ETFs, but sometimes other assets too) to meet your goals.
- Full-service advisor — An advisor can recommend funds and individual stocks to hold in your portfolio. While the service can help you build a portfolio tailored to you, it will cost a little more than a DIY approach or a robo-advisor.
For many investors, patience is the hard part. As an investor, there may be times when you’ll feel discouraged. It’s important to remember that a huge contributor to equity gains is simply time spent in the market. Historically, stocks have returned upwards of 5% per year on average over periods of 10 years or more. 1 And don’t forget the power of compounding. With compounding, you start to earn interest on your interest, and that can be an excellent way to accelerate the growth of your portfolio over time.
FAQ: Investing in stocks
How much should I invest in stocks the first time?
It doesn’t take much to get started. Typically, there’s no charge to set up an account. The fee for a single trade can range from zero commission to approximately $10, depending on where you go. Moreover, the predominance of flat rate commissions means the fee is the same regardless of the number of shares you purchase at one time. Using a TD Easy Trade account for example, you can start investing ETFs or stocks with no minimum dollar amounts needed. So, whether you have $50 or $1,000, you can become a bona fide investor.
When should a beginner buy stocks?
It’s never too early to buy stocks. Some parents set up trust accounts for their children from a very young age, which the kids can start managing themselves when they turn 18. If you’re under the age of majority (typically 18 or 19, depending on the province or territory), you will need a parent or guardian listed on the account. As long as you have money to invest, have done some basic research and are comfortable with the volatility involved, you’re ready.
Can I make money in stocks as a beginner?
Yes! Just don’t expect it to happen in the first month or even the first year. Truth be told, successful investing can be boring — that’s because the goal of many prudent investment plans is stable growth over the long term.
- “U.S. stock market returns – a history from the 1870s to 2022,” The Measure of a Plan, January 5, 2023, https://themeasureofaplan.com/us-stock-market-returns-1870s-to-present/ ↩