For many people new to investing, the stock market can seem like an incredibly complicated, dangerous, and daunting place. Still, somewhere inside of us, we want to know how to start investing.

Many of us already know investing is the smart thing to do. We just need the tools and the motivation.

Well, economists predict that younger generations of Canadians will be financially worse off than their elder counterparts are during retirement.

Add to that the fact that investment is quickly becoming the only way to keep up with inflation and the cost of living in Canada. In 2021, about 77 percent of Canadians are actively investing.

It’s time to face the facts: holding onto your cash is not going to help you accrue personal wealth. The reality is, you don’t need to have a lot of money to start investing. You could even start with as little as $100. Read on to learn how.

 

How Stock Market Investment Works

A stock market is a way for companies and investors to trade shares of companies in exchange for money. These shares are called stocks. Stocks are a piece of equity, or a share of ownership, in a company.

When you invest in a company, you buy a share or a portion of a share in the company’s stock. The purpose of investing is to generate what is called a positive return, or to make a profit off your investment.

Shares of companies change prices all the time. So if you buy shares at a certain price and then the cost of those shares increases, you make a profit.

More often than not, stocks get traded on public stock markets. Stock markets can trend up or down and have good years or bad years. Individual stock values can increase and decrease over time as well.

This is why it is important to invest wisely and to diversify your investments by investing in a variety of different industries.

 

Preparing to Invest

If you want to set yourself up to start investing successfully, it’s best to be able to create a process where you invest a small portion of your monthly paycheck. It is recommended that you save up at least three months of emergency funds before starting to invest.

It is also best if you are out of debt or have a handle on your debt. To really make the best financial planning decisions for your future, you should also be following a budget that suits your means. 

Build an Emergency Fund

Your emergency fund is a chunk of money you’re setting aside for the proverbial “rainy day.” It’s impossible to predict when an accident, disaster, stroke of misfortune or other emergency will happen. You need to be prepared.

Having an emergency fund will make you a better investor. That’s because when you have an emergency fund, you’re less likely to panic when the market isn’t doing so hot.

The reality is, stock markets go through cycles. One year might be good, the next bad, and the one after that you might end up exactly where you started, neither gaining nor losing money.

If you don’t have an emergency fund to sustain you through lean times, you might make the foolish move of selling your investments at the wrong time. This will cause you to lose money in the long run.

Having cash set aside will allow you to make better investment decisions and keep you cool, calm, and collected.

Stabilize Your Debt

There’s no need to feel bad if you have debt. The average Canadian debt is $73,000, and credit card debt is the most common type of debt in Canada.

If you have high-interest-rate credit card debt, you need to focus on paying that off before you start investing.

If you invest when you already have credit card debt, you will likely pay a higher interest rate on your debt than what you are earning through your investments. That is unless you have invested a huge amount of money.

If you can earn more money through investing than your debt is costing you in interest, it makes sense to invest. However, paying off your high-interest debt is more likely to provide a better return.

Create a Budget

If you’re not already on a budget, it’s time to start one. Creating a budget is a very basic way to balance your expenses with your income.

It will be much easier to keep track of your investments and understand how much money you have to invest if you have a budget in place.

 

How to Start Investing

Everyone loves to say anytime is the right time to start investing. The fact is, that’s mostly true.

Sure, it makes more sense to invest when stock prices are low, but advisers will also tell you the earlier you invest, the better.

A lot of people are very anxious about starting to invest, but you don’t need to be. With a bit of guidance, it isn’t hard to learn how to be smart about money.

Try a Robo-Advisor

To really get good at investing takes a lot of time, research, and analysis. If you’re nervous to try investing on your own, one thing you can do is try a robo-advisor.

A robo-advisor uses algorithms to help you make investments. You answer some questions about your finances and your investment goals. Then your robo-advisor invests the money for you.

Robo-advisors are great for beginner investors, and they’re a whole lot cheaper than hiring a financial advisor. Plus, they’re extremely easy to use. 

Consider ETFs

An exchange-traded fund, or ETF, is a type of index fund or pool of stocks and bonds. So when you invest in an ETF, you actually invest in many different companies, likely within a certain sector or industry.

To make matters better, exchange-traded funds get traded the same way that stocks do. You can buy a single share of an ETF, which can cost less than $100. Investing in a mutual fund could have a much higher minimum investment.

ETFs also make it very simple to diversify your portfolio, which means you’re not putting all of your eggs in one basket that could crumble and crush all your dreams. 

Invest in Fractional Shares

Investing in fractional shares is another great way to invest small amounts of money. It’s also a great way to invest in companies whose shares are more expensive than you’re able to commit to.

Many major companies allow investors to buy shares of their stocks. So it is possible to buy a fraction of a share in, for example, Hydro One at a reduced price. Your portion of the share will appreciate at the same rate as a full share.

Contribute to an RRSP or a TFSA

Investing in a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA) has the added benefit of tax deferral. Invest money in an RRSP or a TFSA and get a reduction on your taxable income in the amount of your contribution.

This is a great way to get started investing because you’ll save money in taxes while contributing to your retirement fund. Additionally, you can still invest that money in stocks or ETFs.

 

Once You’ve Started Investing

Once you’ve dipped your toe in the water, don’t just hang up your towel and call it a day. Even if you use a robo-advisor to invest your money, you still need to do things like track your investments.

Other important things to do after you’ve gotten started investing are to work on diversifying your portfolio and continue your investment education. Finally, do your best to be patient and understand how the market operates.

Diversify Your Portfolio

As we discussed, stock values fluctuate. So investing all of your money in one company is not the best course to take. The more you spread out your investments, the less you risk losing large amounts of money.

Set Up Automatic Monthly Contributions

Make it easy to invest on a regular basis by setting up automatic contributions from your paychecks. If you budget properly and make investing a habit, you will experience greater returns in the long run.

You can set up automatic contributions directly through your bank account.

Be Patient

The most important advice you need to remember is to be patient. Do not stress over the short-term trends of your investments. The way you make money by investing is by focusing on the long-term.

Watching your investments too closely can create fear and anxiety. Check on your investments once a month and let the market do its thing.

Keep Learning

While you’re doing your best to be patient, continue your education. Here is a collection of common stock market and investment terms you should understand if you really want to get good at investing:

  • Compounding returns are the amount of money your principal investment accrues over time.
  • bull market is how we describe a period of time when the market is growing at a steady pace.
  • bear market is what we call it when the market is either stagnating or declining.
  • A broker is an individual or investment firm that makes stock exchanges on the behalf of an investor.
  • Appreciation is when the price or value of a company’s stock increases.
  • dividend is a cash payment or additional stock given to the shareholders of a company when the company experiences excess profits.
  • The capital gains tax is a type of government tax that applies to any profits you make when you sell an investment.

Once you’ve mastered these terms, continue to seek out more resources that will make you a smarter investor.

 

Takeaways for Investment Beginners

Learning how to start investing can feel very overwhelming, but as you can see, it doesn’t need to be. The best ways to start investing as a beginner are to invest in ETFs, fractional shares, RRSPs, and TFSAs.

For the most low-maintenance way to invest, try using a robo-advisor. Most importantly, make sure you are in a good financial position to invest. If you’re currently in debt, focus on paying down your debt before investing.

If you need help stabilizing your debt, you can submit a loan request for a short-term loan online and get approved within the hour.