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.
Before you start investing, there are a few things it’s important to assess:
Your knowledge about investing
What is your level of investment knowledge? Did you minor in finance? Is Wolf of Wall Street your favorite movie? Do you know the difference between a bond, a stock, and a fund?
There are many resources online. Financial planners often offer free sessions to attract new clients. You can read financial blogs, books, and magazines, and listen to podcasts to brush up areas of investing you want to understand.
Your risk tolerance
Every investment has some risk, and some are more volatile (riskier) than others. The value of your portfolio can increase and decrease dramatically, and it’s important to invest in a way that isn’t going to leave you panicking every time there’s a downturn. And there will be downturns.
Risk tolerance is so important that financial advisors are required to review it with each client. It’s part of the process known as “know-your-client” or KYC, and it’s a legal requirement for licensed advisors to complete.
If you want to practice DIY investing, there are risk tolerance quizzes you can take online. When in doubt, start more conservatively. You can increase your risk level as you get more comfortable.
It’s important to keep your investment goals in mind. Set short, medium, and long-term goals to help you choose the best investment strategy.
Investments can be made with specific goals—perhaps a future real estate purchase, a child’s university tuition, travel, or your retirement security. What you intend to do with the money will dictate what kinds of accounts you should open.
It’s important to understand the different tax implications of your investments. While you get a tax break when you invest in Registered Retirement Savings Plans (RRSPs), and any investment earnings are tax-sheltered, you have to include the money as income when you withdraw it. Depending on your other sources of income, that could come with a large tax hit.
A tax-free savings account (TFSA) is often a better option for shorter-term goals. In our article, you can learn more about the differences between RRSPs and TFSAs.
Look at your full financial picture to know how much money you can invest. While it’s good to start investing, you don’t want to dig yourself deeper in a hole. All investments carry risk, so don’t gamble with money you cannot afford to lose.
Sometimes it’s better to wait to invest, or start with a smaller amount to invest, and put additional money into paying down your debt. Less debt means more money.
How to start investing
You’ve figured out your goals, your risk tolerance, and you’ve done some basic research. Now what?
Let’s do a quick rundown of the types of investments available.
A GIC is a “secured investment.” The GIC earns interest for a set term, and at the end of the term you will receive your initial investment, plus whatever investment earnings you receive.
GICs are considered one of the safest investments.
GICs can be cashable, meaning you can take the money out before the term, or non-cashable, which means the funds are locked in for the term. Cashable GICs usually pay less interest in exchange for the convenience of having access to your money.
The terms of the GIC contract must specify the rate of interest, term, whether it’s cashable or non-cashable, and what happens at the end of the term. Unless you give instructions, some will reinvest for another term at the current interest rate.
Bonds and Treasury Bills (T-Bills) are similar to GICs. Instead of putting a lump sum into a GIC, you are lending the money to a company or government for a term in exchange for a specified investment return. T-Bills generally have shorter terms than a bond or GIC.
Note that government bonds are less risky than corporate bonds, so corporate bonds tend to pay better.
Stocks are a share of ownership in a company. A company must apply to be listed on the stock exchange, then perform an initial public offering (IPO), which is the first opportunity for individuals to purchase stock (shares) in the company.
The price of the stock is determined by the number of shares, plus the supply and demand for the stock on the stock market.
Some companies allow investors to buy stock directly. Most stock purchases and sales are conducted through a stock exchange, either through a self-directed account or through a stock broker who acts on behalf of an investor.
There are two basic types of stock: preferred and common. Preferred shares typically don’t have voting rights at an annual stockholders’ meeting, but they can earn dividends, which is a share of the company’s profits. Common stocks come with voting rights. Some common stocks may also receive dividends, although preferred stockholders are always paid first if a dividend is being paid.
Stock prices can increase or decrease. Depending on how well the company does, you can lose some or all of your investment.
A mutual fund is a “pooled” investment made up of funds from various investors. Investors buy units in the mutual fund, which invests in underlying securities such as stocks, bonds, and T-bills. Mutual funds invest based on risk profile or investment sector. (A bond mutual fund invests in various bonds; a health sector fund invests in companies in the health sector, etc.)
Mutual funds vary in risk, depending on the fund’s portfolio goal and risk profile.
Exchange-traded funds (ETFs) are similar to mutual funds because they are a pooled investment where investors buy shares in the ETF, which then invests in underlying securities.
The ETF is created to mimic an index, and investments are managed using an algorithm. The fund owns shares in the same proportion as the index that it is tracking. ETFs can only be bought and sold on a stock exchange.
The main difference is that while most mutual funds are “actively” managed—a portfolio manager buys and sells underlying securities to meet or exceed the fund’s investment goals. (An index mutual fund is passively managed and designed to replicate an index).
An ETF is “passively” managed to match the return of the index it follows. You can learn more about active and passive investing here.
Cryptocurrency has been getting a great deal of attention the last few years. Bitcoin and Ethereum are two popular versions, but there are many different forms of crypto.
It’s a form of currency that is digital and encrypted. Blockchain technology creates a ledger, and every transaction is added to the ledger, and everyone who uses the cryptocurrency gets their copy of the ledger, so everyone can see each transaction.
The ledger is distributed across a large number of computers. One of the attractions of Blockchain is everyone can see every transaction, so it becomes difficult to fabricate or create false entries, since every computer who has the ledger has a copy of the transactions.
Before the transaction is added to the ledger, it must be independently verified, either through an algorithm that computers must solve, or by setting aside a certain amount of crypto as a “stake” or guarantee.
While you can use crypto to buy items, most people consider it an investment like stocks or mutual funds. Crypto may be popular, but they have a number of risks associated with them and investors need to do their research before dipping a toe in the crypto pool.
NFT (Non-fungible assets) is a class of cryptocurrency that is used to represent ownership in a tangible asset such as art or real estate. They use the same blockchain technology as cryptocurrency with some important differences. NFT sales hit $29 billion in 2022, but they are not for everyone.
For example, digital art has become very popular, but it’s not something you can hang on your wall like typical artwork. An NFT works like a certificate of ownership, and blockchain technology makes it difficult to create fraudulent NFTs. There can be millions of copies of something (how many copies of Leonardo DaVinci’s The Last Supper are in existence) but there is only one original. An NFT identifies ownership of the original.
People invest in NFTs just like any other investment: they hope it increases in value so they can sell for a profit. Digital artist Beeple spent 14 years creating a piece of digital art a day. He recently bundled 5000 into a collection, and the NFT was sold at Christie’s auctions for over $69 million.
NFTs are not for a novice investor as they come with a high degree of risk.
There are other types of investments, such as options, futures, or leveraged funds. . A good strategy to consider is diversification. It’s the old “don’t put all your eggs in one basket” idea, where you have some low-risk investments, some bonds, some equities, and the proportion is determined by your goals and risk tolerance.
Ways to start investing
Once you know what your investment goals are and what your risk tolerance is, it’s time to start investing.
Open an account
The kind of account you open will depend on what kind of investments you have decided to invest in. There are many options available to you today, including banks, credit unions, investment dealers, brokerage firms, and robo-advisors, such as Wealthsimple.
You must be the age of majority in your province of residence to open an investment account. For most provinces, that’s 18 or 19. If you’re under 18, your parents or guardian can open a trust account for you that you can take over when you reach the age of majority.
The exception is an RRSP. There is no age limit to open an RRSP, as long as you have taxable income. The only age limit applies to closing it, which is December 31 of the year you turn 71.
Fund the account
Before you can invest, you need to deposit funds into the account. Many firms require a minimum account balance, although some will waive it if you make monthly deposits. Here are three common methods for funding:
Pre-authorized deposit: PAD is one of the easiest ways to invest. You arrange monthly withdrawals from your bank account to your investment account. Small amounts can add up quickly.
Lump sums: Did you get a bonus, a tax refund, birthday or Christmas money? Stash that money in your investment account.
Payroll contributions: Does your employer offer a retirement compensation plan such as a RRSP or Registered Pension Plan? Max out your contributions with a payroll deduction. Contributions come right off your cheque, and into your retirement plan.
Making regular contributions over time is one of the most effective strategies for accumulating wealth. It allows you to take advantage of compounding. Your initial investment earns investment income, and if you leave it alone, the earnings start earning investment income and continue to grow. It’s like having free money. Here’s more information on the best investment strategies.
Make sure you understand deposit minimums, brokerage fees, and other administrative charges before opening the account. No one likes surprise fees, which must be clearly outlined and disclosed to you.
How to start buying stocks
You will need a brokerage account if you want to buy stocks directly. You can open an account online or through a brokerage firm. You need to be the age of majority in your province of residence. There are commission-free online brokerages, or you can use a traditional stockbroker.
You can hold your stock portfolio in a non-registered or a registered account, such as an RRSP or TFSA. If you hold your stocks in a registered account, the investment earnings grow tax-sheltered, and you do not need to declare capital gains until you withdraw the funds from the RRSP. Of course, you cannot use capital losses to offset capital gains if the stocks are held in a registered account.
Do your research and decide which stocks to buy. Place your buy order.
Remember that mutual funds and ETFs hold stocks in the underlying investment portfolio. The advantage of a pooled investment is the ability to buy a larger number of stock shares than an individual could typically afford.
Ways to invest
There are many different investment options and ways to invest.
Through your bank
You can open an investment account with your bank. However, if you want to buy mutual funds, in-house bank advisors are usually only licensed to sell the bank’s own funds, so you might be limited. The fees they charge can be pretty high as well.
Through a discount brokerage
If you want to manage your own portfolio, there are discount brokerages that allow you to open an account and buy and sell stocks, bonds, ETFs, mutual funds, and other investment products.
Through a financial advisor
You can hire a financial advisor to manage your portfolio for you. They will develop a financial plan, buy or sell investments, monitor your returns, and send you reports. It can be pricey, and you need to do due diligence to make sure the person you are trusting your money to is reputable.
Through a robo-advisor
A robo-advisor is an online investment firm that offers portfolios of ETFs designed for different risk tolerances. The portfolios are rebalanced as needed to maintain the investment goals. You may have less choices than DIY, but for a novice investor, you might have less sleepless nights.
Frequently Asked Questions
You can open an investment account when you reach the age of majority in your province, which is usually 18 or 19. The earlier you start investing, the more money you can save over time.
The three basic categories of investment are cash and equivalent, bonds, and stocks. Although there are lots of variations within each category.
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