Stock markets are volatile, which can make investing in stocks a nerve-wracking process. But with the right knowledge, investing in stocks need not be intimidating. Investing in stocks is a great way to grow your money over time. Stocks are essentially shares of ownership in companies, and they can be an excellent source of passive income over time. The downside is that there are risks involved with investing in stocks, so you should understand these risks before you start buying them. But if you know what you’re getting into beforehand, investing in stocks can be a very profitable decision. In this article, we will explain everything you need to know about how to buy stocks in Canada as a beginner investor.
Why Should You Invest in Stocks?
Stocks are a type of investment that you can use to grow your money over time. Stocks are essentially shares of ownership in companies. When you invest in stocks, you become a part owner of those companies, so if the company does well, your stocks will increase in value (and you will make a profit). If a company does poorly, you could lose some or all of your investment. The goal of investing in stocks is to have your money work for you. You can make your money do the work for you. There are a few reasons why investing in stocks can be a good idea, including: – Stocks are a great long-term investment – You can set and forget about them for years at a time, and you’ll still see results. – Stocks can provide a steady stream of income – You may be able to collect dividends, which are payments from a company based on how many shares you own. – Stocks can help you build wealth over time – If you invest wisely, you can increase your money over the long term. This is key to achieving financial freedom. – Stocks can be less risky than you might think, if invested wisely. – In the long run, you’ll be able to make money in spite of short-term volatility.
Stock Market Basics
The stock market is a place where people can buy and sell stocks. There are many different types of stocks, but they all have one thing in common: A promise of future profits. When you invest in stocks, you become a part owner of a company. Stocks are volatile and risky, and you should never invest money that you cannot afford to lose. When you’re thinking about investing in stocks, you’ll need to understand a few key concepts.
- Price – The price of a stock is the amount you will have to pay to buy one share of that stock.
- Value – The value of a stock is how much a share of that stock is worth.
- Price and value are not the same thing – The value of a stock is determined by the amount of profit it is expected to make. Price and value are determined by supply and demand. The more people want to buy a stock, the more its price will go up. The more people want to sell a stock, the lower the price will go. This is a very simplistic definition. Demand is affected by many things. Things like company profits, company reputation, and overall economic conditions can all affect the demand for a stock.
How to Buy Stocks?
If you want to get started investing in stocks, the first thing you’ll have to do is open an investment account. You have a few options when it comes to deciding where to open an account, including robo-advisor services and online investment brokers. You can open an investment account at a discount broker like Questrade or online investment brokerages like Wealthsimple. You can also open an account at a bank, but you may find that the selection of investment options is more limited. You’ll first have to decide which type of account you want to open. You have three basic options:
- Registered retirement savings plan (RRSP): You’ll get a tax deduction on the amount you contribute to your RRSP. But withdrawals will be taxed as income.
- Tax-free savings account (TFSA): Money in a TFSA is tax-free.
- Trading account: You’ll have to pay taxes on any profits, but you don’t have to pay taxes on the original amount you put into the account.
Types of Investment Accounts
- Registered retirement savings plan (RRSP): An RRSP is a tax-deferred savings plan that allows you to save money for retirement while reducing your tax bill.
- Tax-free savings account (TFSA): A TFSA is a type of savings plan that allows you to earn a tax-free growth rate on your money. You won’t have to pay any taxes on the money when you take it out of the plan.
- Trading account: A trading account is an account where you buy and sell stocks. You don’t earn any interest on the money you deposit in a trading account, and you will have to pay taxes on any profits you make.
- Mutual fund: You can’t buy a mutual fund with cash from your bank account. Instead, you buy a stake in a pool of stocks held by a mutual fund manager. Your money is then invested in those stocks.
Options to buy stocks: Mutual funds and ETFs
While stocks are volatile and risky, mutual funds and exchange-traded funds (ETFs) are relatively safe because they own stocks (like individual stocks) and other assets (like bonds). When you buy mutual funds or ETFs, you are investing in a basket of stocks. When a company does well, the profits are shared among all the companies that the mutual fund or ETF owns. This means that if one company goes bankrupt, it won’t affect your overall investment. There is less risk involved with investing in mutual funds than with investing in individual stocks. Investing in a mutual fund provides more diversification which leads to less exposure.
Limitations of RRSP and TFSA
Tax-free savings account (TFSA): While you don’t have to pay taxes on income from TFSA, unlike RRSP contributions to TFSA can’t be used to lower your taxable income.
Registered retirement savings plan (RRSP): One of the biggest drawbacks to investing in an RRSP is that you have to pay taxes on the money when you take it out of the plan. However, this tax payment is deferred until you retire. Another drawback of RRSP is the maximum annual contribution limit.
Bottom line
Stocks can be a great way to grow your money over time. Stocks are essentially a promise of future profits, so if a company does well, your stocks will increase in value. You should understand the risks associated with investing in stocks beforehand. When you’re ready to start buying stocks, you can open an investment account at a brokerage. When deciding which account to open, you have a few options. You can open an RRSP, a TFSA, or a trading account. And when you’re ready to buy your first stocks, you can choose from a variety of investment options, like ETFs and mutual funds.
