How to Invest: A Primer for Canuck Novices
It can be confusing to figure out how to get started when you're brand new to the world of investing. Which came first, the account, or the broker? Should you tackle it on your own, or use a pre-programmed service? In addition, how do you decide which investments are best for you?
First-time Canadian investors should familiarize themselves with the fundamentals:
An Introduction to Investing: What Exactly Is an Investment?
Simply put, investing is putting your money into something with the expectation of a return that is greater than the amount you initially put in. Businesses, properties, stocks, and other asset classes can all be invested in, but none of them are sure bets. Stocks can drop in value as a result of company failures, market fluctuations, and other factors. For this reason, investing can be a dicey proposition.
A BMO Financial Group study found that 77% of Canadians have some sort of investment portfolio, and one of the simplest ways to do so is by opening a separate account for your investments. Financial intermediaries called "brokers" offer these types of accounts to their clients. Investments can be made at any of Canada's major banks, any of which is also a registered brokerage.
Comparison of Savings and Investment
Both savings and investment have the same overarching goal—financial security—but they go about doing so in very different ways. The goal of saving is to have access to the funds at some point in the future, likely in the distant future. Investors take on risk by purchasing an asset with the expectation that its value will rise.
Any money you deposit into a savings account, for instance, is assured to accrue interest at a predetermined rate, no matter what happens to the value of the dollar. Since the interest rate on savings accounts varies, the rate at which your money grows is not fixed but is still guaranteed. Additionally, your initial deposit is risk-free. However, investments almost never come with any sort of assurance, so there's no telling whether or not you'll make a profit. What's more, it's possible that you could end up losing some or all of the money you put into an investment.
If that's the case, then why not just use a regular savings account? In 2022, the average interest rate for high-yield savings accounts in Canada is 1%. NerdWallet research indicates a drop of 29% The S&P/TSX Composite Index, a benchmark of the Canadian stock market, returned an annualized 8 Increased by 68% in the last decade That 7 You could make an extra 39% if you take a chance on an investment.
The true impact is apparent when one considers how most Canadians put their tax-free savings account (TFSA) to use. BMO's 2022 annual savings study found that 63% of Canadians have a TFSA, with 56% of those accounts simply holding cash. More than 75% of some people's savings are in cold hard cash. Okay, so maybe that doesn't sound like anything special; after all, isn't that what savings accounts are for? Well, yes But a Tax-Free Savings Account (TFSA) can store both cash and investments. Half of Canadians are unaware of this, and those who aren't losing out on significant tax-free earnings.
You can count on interest from a savings account, but you could potentially earn many times as much from investing those funds. However, not everyone should invest If you're just getting started in the investment world, there are a few things you should think about.
It's Time to Start Over
Tips for Making a Wise Investment
If you're just getting started in the investment world, here are three questions to ask:
Is your interest rate sky-high?
Various forms of debt carry different risks. Interest rates for both adjustable and fixed Canadian mortgages will hover around 1% between 2019 and 2021. 46% to 5 58% The average interest rate on a Canadian credit card is 19%, so that's a huge difference. NerdWallet research shows that the interest rate on debt can vary by as much as 4 percentage points.
Debts with high interest rates, such as credit card balances, can eat away at the profits from your investments.
Suppose you invest $100 and receive $10 back one month later. You've just made $10. Except you also have a $1,000 balance on your credit card, which has a 20% interest rate. The $10 in investments yielded $16 in profit. 60 in interest charges, turning a $10 profit into a loss. 60 loss
Debts vary in their relative expense. You don't have to be debt-free to open an investment account, but you should take stock of your financial situation and make paying down high-interest debt a top priority.
Do you have a contingency plan in place?
Prepare for the possibility of sudden, unforeseen costs, such as vehicle repairs or a loss of income, by setting aside some money in an emergency fund. Even if you can only save a small amount at first, it will help you immensely later on.
If you want to invest with more confidence, starting an emergency fund first might be a good idea. Because you have a backup plan for your finances in case your investments fail.
Are you willing to risk money that you do not need to live?
Any investment carries the possibility of loss, though some are riskier than others. You should only risk money that you can afford to lose, in whole or in part.
Furthermore, you may need to put money away for a while if you want to invest in bonds or guaranteed investment certificates (GICs), which are lower-risk investments. Your investment funds should be money you can afford to set aside for a while.
Regaining the Summit
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Make a decision on a method of investment.
First, you should investigate various investment options before you learn the ropes. A set of rules for making financial decisions and choosing which investments to include in a portfolio.
It's possible to classify investment approaches into three broad categories:
There are benefits and drawbacks to every possible course of action.
Human management of your investments with minimal involvement from you.
There is always the option of using a financial advisor if you'd rather have someone else handle your investments. Each of Canada's major banks provides clients with investment management services, also known as wealth advisory services. For this method, you'll work with a financial advisor who will create and oversee your investment portfolio.
Investors who would rather not deal with the hassle of managing their own portfolio and would rather have a human financial advisor manage their money should consider this approach.
Investments are made without human intervention using a robo-advisor.
Robo-advisors are an automated investment service made available through some brokerages. This is not a robot-run service, as the name might imply; rather, it is enabled by complex investment algorithms.
So, here's how it goes down:
- A new account is created after a brief online form is filled out.
- The following step involves responding to questions about your investment horizon and savings goals.
- After you fill out a questionnaire, the robo-advisor will create a portfolio for you to invest in.
- The robo-advisor will track your account using sophisticated algorithms and rebalance your portfolio so that it better aligns with your financial objectives. This method is known as "portfolio rebalancing."
Investors who don't want to handle their own investments and are comfortable doing so digitally may benefit from this approach.
Investing on your own accord
Self-directed investing, also known as do-it-yourself (DIY) investing, could be the best option for people who want complete freedom in their financial decisions. Opening a brokerage account and constructing a custom investment portfolio is what this method is about. You'll be on your own to track how your investments are doing and make any necessary adjustments as time goes on.
In order to reap the full benefits of this approach, investors should be self-motivated, enjoy a high level of independence, and not mind the additional work that comes with managing a portfolio on their own.
Investing strategies are not mutually exclusive, so feel free to explore different options. You are free to open as many investment accounts as you like with as many different brokerages as you like, and to try out whatever strategies you like.
It's Time to Start Over
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When do I have enough money to begin investing?
In order to begin investing, you'll need anywhere from $100 to $10,000, the exact amount depending on the investment service you use (if any) and the specific investments you choose to include in your portfolio.
Many Canadian brokerages do not require a minimum deposit, so novice investors can get their feet wet with any amount. But there may be other bare-bones requirements to think about.
For instance, in Canada, some wealth management services require you to have a certain minimum amount of investable assets before you can sign up.
Minimum investment amounts for certain types of investments, such as mutual funds, are another common minimum that investors run into. Putting money into a mutual fund typically requires a minimum of $500.
Investments fall into nine broad categories.
What you choose to invest in has a significant effect on your potential gains or losses. Financial assets, or investments, can take many forms.
- Stocks Traders and investors buy and sell stocks, which are pieces of a company's ownership.
- Investing in stocks through a stock exchange Exchange-traded funds (ETFs) are mutual funds that pool the money of many people so that they can all benefit from investing in the same portfolio of stocks and bonds.
- Stock exchanges These funds invest the money they receive from many different investors. Mutual funds, in contrast to ETFs, are typically actively managed by a professional money manager. For 42% of Canadian retirement savings plans, mutual funds are the go-to investment option. 
- Bonds An investor loans money to a company or government in exchange for interest over a specified period of time in the form of a bond. An example of a common fixed-income security is a bond.
- Derivatives In this case, the value of the asset is based on the volatility of another asset, such as the movement of a stock's price. Options and futures are the two most common forms of derivatives.
- GICs Similar to bonds, guaranteed investment certificates allow investors to lend money to a bank for a specified period of time in exchange for the principal plus interest.
- REITs REITs are businesses that invest in real estate by owning and managing properties. Real estate investment trusts (REITs) are similar to stocks in that investors can buy a piece of the company by paying a share of its
- Forex Investors are able to buy and sell foreign currencies on the foreign exchange market, also known as the FX market.
- Crypto Financial transactions in digital currencies are conducted on the cryptocurrency exchange.
Stock market investing 101
Investors' preference for stock market participation In fact, only mutual funds have more investors. Stocks are one of the riskier investments for novices because learning how to invest in them presents its own unique challenges and potential rewards.
Learn the ropes of stock trading by thoroughly investigating and vetting any company you're considering buying shares in. Before investing, you should investigate the company's financial history, stock performance, and standing in comparison to major rivals.
It's Time to Start Over
Investment Account Choices in Canada
Registered and non-registered accounts are the two main types of investment vehicles available to Canadians.
Canada's government programs provide registered accounts, which offer tax advantages and are eligible for contributions and withdrawals within certain parameters.
Investments that qualify as "registered" can be made in:
Accounts for Saving and Investment That Are Not Part of a Retirement Plan
The government does not regulate or provide any benefits to cash or margin accounts, which are examples of non-registered accounts, because these accounts are not part of any official program.
Accounts such as these are examples of non-registered investment vehicles:
- Money in the bank These rudimentary accounts permit trading in and out of investments using the account's available funds.
- Cash on hand margins To invest, you can open a margin account with your broker and borrow money to invest. Borrowed funds, like those on a credit card, carry a rate of interest that must be repaid.
Ways to Evaluate Investment Agencies
Brokerage firm selection follows development of an investment plan and opening of an account.
In Canada, you can open an investment account with any of the major banks, but independent brokers are also an option. If all you need is an investment account, the fact that these brokers don't offer the full range of services offered by their big bank competitors might be acceptable. Some alternative brokers may even offer more advantageous pricing and more robust market analysis resources.
Check out the brokerage's account tiers, investment choices, and fees when deciding between them. Find out if the broker provides assistance for its clients. Investors should peruse feedback posted on sites like Trustpilot, Reddit, and the Better Business Bureau. Verify their membership in the Canadian Investor Protection Fund (CIPF) and the security of your investments. Investing fees are something you should keep in mind as well, as they can have a significant effect on your return on investment.
When you open a new Qtrade account, you'll get almost $500 in commission-free trades. Restricted Use Areas Only. Date of expiration: October 31, 2022
The Importance of Investing Fees
Investing is no different than any other field in this regard; there are no guarantees. In general, robo-advisors and other forms of automated investment advice charge annual fees that are calculated as a percentage of the client's account value and can range anywhere from 0% to 0.25%. 25% to 0 70%
And keep an eye out for commissions, which are fees incurred every time an investment is bought or sold, especially if you plan to do so frequently. Canadian brokerages typically charge between $4 and 6% in commissions. 95 to per stock trade is the going rate
Similar to the way that credit card interest eats away at your spending power, fees have a significant impact on your bottom line. Higher costs mean lower returns.
To the Top Again
The tax treatment of investments
If your investments do well and produce a profit, also known as a capital gain, you may be subject to paying taxes on that money. The term "capital gain" refers to the profit made when selling an asset for more than it was initially invested in. As well as the possibility of a tax being levied by Canada's Internal Revenue Service.
Half (50%) of your capital gain is subject to taxation. A capital gain of $500 would result from the sale of an investment that was purchased for $1,000 but later sold for $1,500. In this case, only $250, or 50%, of your gain would be subject to capital gains tax. Depending on your tax bracket, your tax liability may increase or decrease.
Here are four pointers for new investors.
According to a survey of 1,116 Canadians conducted online by The Harris Poll in September 2022 for NerdWallet, 81% of respondents said they would worry about their personal finances if the country entered a recession. During a recession, 30% of Canadians are concerned about losing money on their investments.
Both inexperienced and seasoned investors worry about their portfolio values. No one can promise you'll make money on your investment, but there are ways to improve your odds. Here are four things to think about before making your first investment.
1 Get going right this second
It's best to start investing as soon as possible. This is due to the fact that compound interest works to increase the value of an investment over time, so the longer it is allowed to grow, the more money it will eventually be worth.
Time is a crucial factor in compound interest's success. Furthermore, any initial investment is useful for a novice investor, as long as the investor makes it a habit to reinvest the profits they make.
Use what you have right now to get started. With just a little bit set aside each month, you can lay the groundwork for a solid investment portfolio.
(2) Don't put all your hopes on one horse.
This old adage may sound familiar, and it has some relevance to the world of investing. To reduce the risk of losing all of your money, or "eggs," in one investment, diversifying your holdings by purchasing a wide range of assets and making investments in different sectors is a good strategy. Diversification is a term used in the world of finance to describe this
If you want to reduce your exposure to risk and your likelihood of losing money on your investments, diversification is a good strategy. How Why? Because concentrating your investments in one area, like technology stocks, leaves you vulnerable to significant losses if that sector of the market begins to underperform. Diversifying your holdings across a variety of markets and sectors will help cushion the blow of a single investment's decline. Your portfolio as a whole will cushion the blow.
3. Be aware of the dangers
The risk associated with various investments varies greatly. Bonds and guaranteed investment contracts (GICs) are relatively risk-free investments. You can rest assured that your money will be returned to you in full if you put it in these assets. Stocks, derivatives, and virtual currencies are all examples of riskier investments. Most mutual funds and exchange-traded funds (ETFs) can be classified as a "middle ground" option
Even within the same asset class, you may find a wide range of risks. Stocks of newer, less-proven companies, for instance, carry a higher degree of danger than those of larger, more-established firms with longer track records.
For novice investors, knowing the potential downsides is crucial because it shapes the investment approach taken. Money invested in low-risk ways can grow steadily over time, but the returns are typically less spectacular. Investments with a higher risk of loss may yield higher returns.
A person's risk tolerance dictates the types of investments they should have in their portfolio.
Avoid selling in a panic
As a result of inflation, 75% of Canadians say they have made some sort of adjustment to their spending (i.e., they have stopped spending more than they earn). e a NerdWallet survey found that over the course of the last six months, consumers have seen a significant increase in the cost of living due to rising prices. One-fourth say they have cut back on retirement savings, and 8% have liquidated assets such as stocks or cryptocurrency.
Market fluctuations are commonplace and can be attributed to a wide range of causes, including but not limited to news stories, governmental actions, international events, industry regulation, inflationary pressures, and other economic factors.
If the value of your investments drops, try not to freak out. If you're thinking about selling quickly, stop and think about it. When a market isn't doing well, some investors may experience "panic selling," or a sudden desire to get their money out of the market. Short-term thinking like this is rarely the best move for investors, especially those with long-term aims.
In the long run, you may lose more money if you sell all of your investments because you've seen a dip or need the cash and then try to reinvest in the same things. Why Selling low when investing can be risky because of the stock market's history of rebounding and the possibility of incurring further losses. But if you hang on to what you've got, your investments will eventually rise in value again.
Glossary of Investing Terms
- Something you own that can be sold for money is called an asset.
- How much of your savings are put into various types of investments is known as "asset allocation."
- A bear market occurs when the stock market experiences a 20% decline.
- Broker: An organization that acts as a market for the purchase and sale of securities.
- During a bull market, the stock market as a whole increases by 20% or more from its previous low point.
- Dividends are payments made by a company to its shareholders out of its profits.
- Investments that are difficult or time-consuming to sell are called "illiquid."
- Leverage is when an investor uses borrowed funds to increase the size of an existing investment in the expectation of a larger return.
- An investment that can be sold quickly and easily is said to be liquid.
- Profit or loss represents the rate at which an investment generates income.
- How much you are willing to take on in the way of financial risk when investing is known as your "risk tolerance."
- A stock exchange is a marketplace where financial instruments such as stocks and bonds can be bought and sold.
- Stock market volatility refers to the frequency and magnitude of price changes in the market.
On September 6-7, 2022, The Harris Poll, working on behalf of NerdWallet, surveyed 1,116 Canadians aged 18 and up online. Harris online polls use a Bayesian credible interval to assess their sampling precision. The precision of the sample data used in this analysis is / 2 For a 95% certainty interval, that's an increase of 8 percentage points. Please contact Marcelo Vilela at [email protected] for more information on the survey's methodology, including weighting variables and subgroup sample sizes.
A Rise to Power
- Bank of Montreal/Other Financial Divisions Study Conducted by BMO Financial Group on RRSPs, Accessed March 02, 2020
- The Bank of Montreal Financial Institutions," BMO Savings Study, accessed January 11, 2022
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