Investing in the stock market is probably the best way to build long term financial security. By holding a diversified basket of stocks or ETFs you can earn passive income and watch your wealth grow. Many beginners find the stock market scary and intimidating, so they put off investing altogether. But it’s not difficult to get started. 🙂
Introduction to the Stock Market
Stock picking isn’t gambling. But it’s not for everyone. You have to be prepared to do some work. And you have to be prepared for market declines. If you enjoy doing research and learning about companies. And you have a stomach for the ups and down of the market, then investing in stocks can be a lot of fun and rewarding.
A stock represents a part ownership of a company. If a business has 100 shares of stock, and we own 10 shares, then we legally own 10% of the entire business.
How the Stock Market Works
Stocks can be valued a number of different ways. A common method is to use the price to earnings ratio. This is price of a company’s stock price, divided by the annual profit or earnings it generates. If this ratio is below 15 times then the stock may be considered undervalued, and represent a good buying opportunity. Of course this is just one way to analyze a stock. Other methods include the discounted cash flow, or Graham formula.
Where to hold stock to maximize tax efficiency
Tax-advantaged vehicles should be used whenever possible. The government incentivises everyone to save for their own future retirement.
- TFSA. This tax free savings account lets you invest in stocks or other securities and any profit you make is completely tax free. This account gives you the flexibility to save for retirement as well as other big events in your life. If you’re making less than $80,000 a year, it’s generally a good idea to max out your TFSA before contributing to an RRSP.
- RRSP. This registered retirement savings plan allows you to contribute pre-tax dollars from your income. Your investments can grow without tax penalty within the account. And you only pay taxes when you withdraw the money.
- RESP. This registered education savings plan is a must have for any parent with young children. The government will match a part of your contributions, effectively giving you free money for your child’s future education.
- Roth IRA. Similar to a TFSA, this account offers tax-free growth and tax-free withdrawals in retirement.
- Traditional IRA. Similar to an RRSP, investors can make pre-tax contributions and the investments in the account grow tax-deferred. In retirement, the individual pays income tax on withdrawals from the account. If you work for a large company, the 401(k) is the group version of this.
- 529 Plan. Similar to the RESP, this is a tax-advantaged savings plan that is designed to encourage saving for future education costs.
How to buy stocks
The first step is to open a discount brokerage account. The easiest way is to walk into your local Bank branch with 2 pieces of ID (eg: your driver’s license and a credit card,) and ask to speak with a representative to help you open up an investment account. Once you are sitting in a room with the representative tell him or her that you’d like to open up a self directed brokerage account. They will know what to do 🙂 This process is the same at all major banks.
You will need to remember (or write down) 3 important pieces of information when creating your new account with the bank representative.
- Your user ID
- The log in password.
- Your trading password, which you will only use when you actually buy or sell a stock.
Placing a stock order
Once they set you up you will have access to your new account online. Alternative to traditional banks you may also go with alternative discount brokerage firms such as Questrade or Interative Brokers, for example.
Checking your online brokerage account is similar to doing online banking. Simply log in to their site on your home computer using your user ID and log in password. I suggest minimum stock investment should be no less than $1,000 to begin.
Once you have your account set up, you can begin buying stocks. Using TD’s web interface below we can buy some shares of BCE Inc, the parent company of Bell Canada. Most of these boxes are self explanatory.
The Action: is to “Buy” 100 Quantity of the company “BCE.”
We can either choose to buy it at whatever the “Market” price is, or set a “Limit Price” for ourselves which means if the stock price moves higher than this amount we’re not going to buy it anymore. We can also extend the expiration of this order but it’s usually not necessary.
The next step is a summary of our stock order. Since the price of BCE is trading at $47.47 per share, and we want to buy 100 shares, our total principle value is $4,747. Enter the trading password and the order process is complete.
Other brokerage firms should have a similar interface. Selling a company works the same way. Just choose “Sell” instead of buy. And for “Limit Price” it would be for the minimum amount you’re willing to sell at, instead of the maximum you’re willing to buy at.
There also indirect ways of buying stocks. Such as through mutual funds or Exchange-Traded Funds (ETFs.) Funds can provide broad market diversification at a low cost. An ETF is a collection of specific investments, such as a basket of dividend stocks or technology stocks. When you buy a unit of an ETF, you are actually getting exposure to hundreds if not thousands of different companies.
Don’t stop learning
Investing in stocks should be something you continue to do for the rest of your life. So continue learning and growing your investment knowledge over time. Hopefully this article has provided you with everything you need to get started. The rest is up to you. 🙂