Investing For Beginners: 7 Great Tips To Get Started

Guest post by Jessica Morgan of Canadianbudget.ca

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If you are looking into investing as a beginner, the stock market can seem intimidating and perplexing, but honestly, investing is no longer optional. With the rising cost of living, despite higher interest rates, saving money in your bank account will only get you so far. Investing can help you meet your long-term financial goals and access financial growth not available through saving alone. 

We will simplify the essentials of investing for beginners, explain key terms, and provide practical tips to kickstart your journey toward financial growth and security. Whether starting as a beginner investor or aiming to refine your investment strategy, grasping these fundamentals is the initial step in building a solid financial future.

Understand Key Investing Terms for Beginners

We know you are eager to start investing but getting comfortable with some terms and definitions is a great first step before you begin. There’s nothing worse than feeling out of place in a conversation, and learning these terms and concepts will help equip you with some basic investing knowledge.

Risk and Return

When you understand the relationship between risk and potential return, you can more easily determine the most suitable investments. Investing carries risk, and anyone who tells you otherwise is lying. You can better invest in the stock market by understanding your personal risk tolerance and how the relationship between risk and reward works. 

With a lower-risk investment (like a GIC or CD), the potential return is also lower, but be aware that high risk does not always equal high reward. The keyword is POTENTIAL return, not guaranteed return.

Diversification

You have heard the phrase, “Don’t put all of your eggs in one basket.”? That is the theory behind diversification. By spreading your investments across different areas, you can reduce your risk. You can diversify your investment portfolio by investing in various asset classes, regions, industries, or countries. This is one of the first lessons in investing for beginners.

Portfolio

Your portfolio is all of your investments. That could include multiple accounts and all the assets within the accounts. Cash, Stocks, GIC’s, CD’s, Mututal Funds, ETFs, Index Funds, Crypto and other alternative investments can all be a part of a portfolio. Whatever assets you own are included in your overall portfolio.

Asset Allocation

Asset allocation describes what percentage of investments you hold among various asset classes such as Cash, Equities, Bonds, Commodities, Real Estate, and alternative investments.

Brokerage

A Brokerage is an institution that facilitates buying investments in the stock market. To start investing, you must open an account at a Brokerage and select your account type (RRSP, TFSA, RESP, Roth IRA, 529 etc). Many banks have brokerages, but you can also invest independently at a brokerage outside of your bank (Questrade, Wealthsimple, Charles Schwabb, Vanguard, etc.).

ETFs (Exchange-Traded Funds)

ETFs are like a basket of stocks that usually try to replicate an index, follow a trend, or market sector. These funds are lower in cost than mutual funds because they don’t have a fund manager actively picking the stocks to include. By design, ETFs include shares of many companies, so with one single purchase, you could be buying parts of tens to thousands of companies.

Registered Accounts

Investors have access to either Registered or Non-Registered accounts. A registered account is “registered” with the government and provides some preferential tax treatment. In contrast, a non-registered account (or a brokerage account) has no favourable tax treatment. 

Some Common Registered Investment Accounts

Canadian Registered Investment Accounts	American Registered Investment Accounts
RRSP TFSA FHSA RESP RDSP RRIF LIRA	401k 403b Traditional IRA Roth IRA 529 UGMA UMTA HSA

Different Methods of Investing For Beginners

Financial Advisors

Sometimes, the easiest thing to do is to walk into your bank and ask for help from someone in person. If your bank has an investing arm, they can set you up with investments – usually Mutual Funds. Now don’t get us wrong, done is better than perfect. However, investing in this way will cost you more than other options due to the high fees typically charged to manage the Mutual Funds. You don’t pay these fees upfront, but the fees will be deducted from your investments over time, eating away at your investment growth. 

Fees: Highest

Robo Advisor

A robo advisor is an easy-to-use service many brokerages provide to help you invest. They create portfolios of ETFs (lower cost than Mutual Funds) and invest your money for you in a portfolio that aligns with your risk tolerance and timeline. Robo advisor services are usually only offered online or through an app. Although real humans work there and help build the portfolios, there is generally less 1:1 support and guidance. They automatically rebalance the account, which means they keep an eye on how much of one thing is in our portfolio to manage risk (see previous note on asset allocation).

Fees: Low

Self Directed

Once you feel confident in your abilities as a beginner investor, you can open a self-directed account at your brokerage. Within your brokerage account, you can invest directly in the stock market without paying management fees to a robo advisor or financial adviser. You can lower your costs by directly investing in ETFs or stocks. However, you are now responsible for researching and rebalancing your account to ensure it meets your asset allocation goals and buying or selling within your accounts.

Fees: Lowest

7 Tips to Get Started Investing For Beginners in Canada and the US

Here is some practical advice for beginners to implement as they start to invest in the stock market in Canada.

Set Clear Goals

Why do you want to invest? Identify your short-term and long-term financial objectives with this FREE worksheet. Determine where you should be saving vs investing. Look into a high-interest savings account for short-term goals and focus on investing for the long term. 

Understand Risk Tolerance

Understand your own risk tolerance and investing timeline. Women are generally more risk-averse than men, which can negatively impact our investing returns if we choose low-risk investments without evaluating other options. Educating yourself on investment risk can improve your investing comfort level.

Educate Yourself On Investing For Beginners

As a beginner investor, it is a good idea to keep learning. Speak to others about investing, and look for courses, books, or resources focused on investing for beginners to help you. Do not copy what you see others doing, but take it as a point to begin researching what stocks or funds to select when you invest in the stock market. Everyone makes mistakes, but there are some very common investing mistakes you can learn from without making them yourself.

Choose An Investing Style That Fits Your Lifestyle and Preferences

You may be interested in self-directed investing, but do you have the time and interest to research stocks and make investments? Would you prefer to hand your money over to a manager or robo advisor to take care of it? There is no wrong answer as long as you understand the associated fees with each method of investing. 

Start with Small Amounts

Begin with modest investments and gradually increase. Only invest the money you do not need in the short term or can afford to lose. Build a substantial emergency fund and pay off any high-interest debts before investing to ensure you won’t have to dip into your investments when life happens. 

Diversify Your Portfolio

Remember, we are not putting all our eggs in one basket! It’s essential to diversify your investments to manage your risk. If you decide to become a DIY Investor and invest in stocks on your own, you are not only buying one stock and calling it a day; you’re buying many in different sectors and industries to diversify your risk. If you invest through an advisor or a robo-advisor, they will help you accomplish this goal. 

Keep an Eye on Fees

Remember the different fee levels that come with varying investment styles and options. Investing with higher fees is better than not investing at all, but learning to lower your fees as an investor is vital to optimizing your potential portfolio growth. Building your investing confidence to the level where you feel comfortable taking over your portfolio from an advisor or robo-advisor can save you hundreds of thousands of dollars in fees over your lifetime. 

Time To Dive In And Begin Investing!

We hope this primer on investing for beginners has given you some of the basic concepts and strategies you need to begin investing in the stock market. Don’t be scared; keep learning, and soon, you will no longer be someone googling “investing for beginners” you’ll be a seasoned pro with a growing portfolio on your way to reaching your long-term financial goals!