Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
How to start investing in stocks
Know your investing style
There are a couple of ways to go about it. The first option is: Do it yourself. This is also called an active investment style, and it means you’ll have to do loads of research and work. Whatever you do, you’ll have to go through a brokerage, where you’ll have an investment account and will have to keep track of expenses like trading commissions and account fees. You’ll also need to know what kind of stocks you want to buy.
This means you’ll have to research each individual stock you want to purchase, consider how many shares you want, look into the company’s history, its past earnings, and its projected earnings. Then be prepared to ensure your portfolio of stocks is sufficiently diversified for you to minimize your risks—i.e., not putting all of your eggs in one basket. You’ll also have to keep an eye on the stock’s performance and decide when and if to sell your shares.
That's a whole lot of time and effort to spend, and can significantly raise the barrier of entry if you’re feeling unsure to begin with. In fact, Buffett himself said that he discourages practically everyone from picking individual stocks: “The goal of the non-professional should not be to pick winners—neither he nor his ‘helpers’ can do that — but should rather be to own a cross-section of businesses that in aggregate are bound to do well.” The other option would be to use an automated investing service, which we’ll get to in a minute.
Choose an investment platform or advisor
No matter what you choose to do, you’re going to need a broker or an investment platform to make the trade. There are certain things to keep in mind while choosing the right investment platform, including:
What kind of investments you want to make. If you’re interested in stocks, make sure your platform lets you do that. Same goes for bonds, mutual funds, and so on
Whether you want to manage it yourself or have it managed for you
What the account minimum is. Some accounts have low account minimums, meaning you have to have a certain amount in your account at all time. Some accounts have no account minimums
Account fees and trade fees
Extra services, such as personalized advice, and other promotions, such as cash bonuses
Many people choose to do their investing online, since it’s the cheapest and easiest way to start buying stocks. There are a couple of things to keep in mind when going the online route, including the fact that you’ll need to research the kind of stocks you want to buy and know how you want your portfolio to look like from the outset. Online accounts can be opened easily; all you need is a social security or social insurance number, a home address, and an employer’s address (which can be your own if you work from home). Since there is always a certain risk involved with purchasing stocks, it’s important to keep in mind that their performance may vary over time and therefore you need to stay on top of any changes in the market, and always remember that there are never any guarantees.
Online investing takes place on a trading platform, and nowadays there are quite a few to choose from, with different fees and perks. Some platforms will require account minimums, commission for trades, and/or charge for additional access to data, financial advice, and educational resources. Some trading platforms, on the other hand, don’t charge you for any of this.
If you’re new to the whole stocks game and the idea of single-handedly picking stocks makes you break out in anxiety sweats immediately, there’s always the robo advisor choice. Robo advisors are basically automated investment services that will do the job of wealth managers or investment advisors by using sophisticated algorithms to help you pick stocks and create a portfolio based on your financial goals and your risk tolerance. This is called passive investing, and is usually advisable for most of us just getting started in the investment game.
Robo advisors are usually lower in fees, since they tend to offer commission-free trading and usually create portfolios consisting of inexpensive ETFs. Investing in ETFs also has the benefit of lowering your risk, which is often a high barrier of entry for newbie investors. Another advantage? Robo advisors are accessible 24/7, no appointments necessary. And since the companies operate entirely online, you can sign up to a robo advisor, deposit money, check your balance, withdraw money, etc., all from the comfort of your own home.
If you're confident that you know what you’re doing, you may choose offline investing. This means you’ll have to fill out paperwork indicating what stocks you want to buy or sell through the help of an investment manager, who oversees your portfolio. The other option is to channel your inner Gordon Gekko (but without all that illegal insider trading) and do trades over the phone. The first option is expensive, the second is really not recommended unless you’ve really studied up on the individual stocks you’re trading with and are confident that you know what you’re doing.
A financial planneris the white-glove service of stocks trading, both offline and on. It’s usually the most expensive option but guarantees you’ll get the highest level of service. Simply put, a financial planner is anyone who helps you manage your money, whether that’s a stockbroker, an accountant, or a retirement specialist. The most prudent choice is a Certified Financial Planner™ (CFP®), because they have undergone testing and are legally obligated to place your interests above any other concern and cannot make commissions from managing your assets.
But again, this level of service comes at a price (although some services offer free perks like a portfolio review session). You’ll usually have to pay a flat fee, commission, and perhaps consultation fees and fees priced at the percentage of assets under management. So before you choose this route, it’s important to know exactly how much you’re paying for and whether it’s worth it for you, since fees can really eat into investment gains if you don’t plan carefully.
Set a budget
Once you’ve decided what platform you want to use, it’s time to know how much money you’re willing to spend and how much you’ll need to start investing. The most successful investors, regardless of their budget, are in it for the long game—that means you’re willing to let your money sit for a minimum of five years, preferably longer. The longer it sits, the more it’ll be protected against losses in the long term, since fluctuations in the market are inevitable but will even out over a long-term average. Your patience will also reap the rewards of compound interest. So no matter your budget, it should be an amount that you’re comfortable with leaving untouched for a significant number of years.
Don’t worry if you can’t afford a share of your favorite company’s stock, which can sometimes cost several thousand dollars—many brokerages require no minimum deposits to open an account, and allow you to purchase ETFs (which include fractional shares) and mutual funds that provide immediate stock market exposure to any investor.
(If you're asking yourself, “What are these ETFs this article keeps mentioning?” here's the answer: ETF stands for Exchange Traded Funds, which are bundled investments comprised of large swaths of investments from different stocks to bonds and real estate. Since ETFs trade on the stock market, buying a unit is as simple as buying a share in a company.
So now that that’s out of the way, it’s important to point out that you shouldn’t wait until you have a big wad of cash lying around to start investing. The best time to start investing is right now. Before you get started, though, take an honest look at how much debt you have. If you have debt, especially high-interest debt, pay it off before you do anything else. Second, make sure you have an emergency fund, which is about three to six months’ worth of expenses tucked away in a solid savings account. After that, you’re ready to start allocating some funds to investing.
Most people want to invest in order to build up longterm savings, especially for retirement. If that’s the case, then you should be planning to invest about 10% of your net income. Again, make sure that this isn’t money that you might need in the near future; that’s what your emergency fund is for. When creating a budget for your investments, also keep any government or employer-sponsored retirement plans_ such as 401ks, IRAs, and more.
Once you’ve created a budget, stick to it. The best trait for successful investing isn’t an encyclopedic knowledge of the market, but consistency. Many investment accounts will let you set up automated monthly deposits from your regular checking account, which ensures that the same amount is invested each month, without you even having to do anything (except ensure that the funds are available).
If you feel confident enough to play the market a bit or are interested in purchasing one stock in particular, then you should allocate funds specifically for that. It’s ideal to have some small amounts lying around for this purpose that you won’t miss too dearly if you do happen to lose them. Think of it as a kind of gambling budget, where you’re not necessarily counting on getting that money back. If the stock you want to buy has a high price, then that’s also something you’ll need to factor into your budget.
Decide what stocks to invest in
If you feel that you’re familiar with the market and with individual companies, you can simply pick and choose the stocks that you want to invest in and create your own portfolio that way. But for those of us who might not be so sure, or don’t have the time to do some in-depth research on all the companies currently trading on the S&P 500, bundling your portfolio in ETFs is probably the way to go.
The reason why we keep going on about ETFs is that they’re a great way to diversify your portfolio. By having diversified investments, you ensure that you’ll be invested in enough sectors to be able to take advantage of positive trends without being wiped out by negative ones. So if you really want to invest in real estate, you can, but you won't be totally dependent on that market; In the unfortunate case that real estate values should suddenly tank, your losses won't be as bad because of your investments in other areas. With ETFs, you’re not just investing in stocks; you’re also investing in bonds, real estate, and other sectors, thereby spreading your money out and making more financially stable choices.
If you’re picking stocks yourself, it’s helpful to follow the 5% rule: This states that proper diversification means that no one investment or sector should account for any more than 5% of an entire investment portfolio. If you’re trading with ETFs, you might very well hold more than 5% of your portfolio in one ETF or mutual fund and still be following the 5% rule because they’re made up of bundled stocks and sectors.
Now that you’ve allocated some funds for investment purposes and decided what your investing style is, it’s time to get started! Are you going to be an active or a passive investor? The great thing about being a passive investor is that most of the process is automated for you. You sign up with a robo advisor, answer a couple of questions about your financial goals, habits, and risk tolerance, and set up monthly deposits to get the ball rolling.
If you want to pay extra for the services of a financial planner, then you’ll have to set up a meeting with them to create and execute an investment plan based on your budget and your assets. Or, you can trade yourself, either by picking up the phone or using an online brokerage.
When you start investing, it’s also a good idea to pick accounts that will give you a nice tax advantage. Retirement accounts such as GRSPs and RRSPs offer tax incentives, as do Tax-Free Savings Accounts (TFSAs).
Stick to your plan
As mentioned before, no matter what route you choose, the most successful investment strategy will be consistency. It’s especially important to not freak out and change your plan just because the market is suddenly dipping or the next Tesla is having an astronomical rise. If you’ve diversified your investments, you’ll be well-isolated from these dips and turns. And while a rising stock may be tempting, it can fall just as quickly. In the end, your diversified investments will likely pay off, especially if you play the long game: studies show that historically over time, markets like the S&P 500 tend to level out and return to an average of 7% annual returns.
Has all this talk about stocks made you keen to get started? Still have questions? That’s normal, and we’re here to help. Wealthsimple will help you plan for your financial future and get you acquainted with the ins and outs of investing, all at a low cost and with professional financial advice. Sign up here to get started.