Beginners: How to Trade Stocks Without Losing it All

If you invest in ETFs like iShares S&P/TSX 60 Index Fund (TSX:XIU), you are less likely to lose it all compared to holding individual stocks.

| More on:
stock research, analyze data

Image source: Getty Images

Are you interested in trading stocks but worried about losing it all? If so, there is one principle that will help you more than any other: diversification.

By buying diversified portfolios of stocks instead of individual equities, you can simply buy, hold, and rest easy.

In this article, I will show you the fastest and easiest way to build a diversified portfolio that you can invest in with relatively little risk.

Focus on ETFs

For most investors, exchange-traded funds (ETFs) are the best assets to invest in. You don’t need any deep insights into individual companies in order to own them, and they can be very cheap (in terms of management fees).

Consider iShares S&P/TSX 60 Index Fund (TSX:XIU) for example. It’s a diversified fund that holds the 60 largest Canadian stocks by market cap. It has a 0.16% management expense ratio (MER), which is pretty low. Additionally, it is highly liquid, as it is the most popular ETF in Canada. By buying diversified index funds like XIU, you reduce your risk, by “spreading your eggs across many baskets.” The result is a satisfactory return at a much lower level of risk than you’d assume by holding one individual stock.

Diversify your funds

Once you have chosen one fund to invest in, your next step is to diversify even further. As an amateur investor, your goal should pretty much be to achieve the highest level of diversification possible. To that end, you might want to allocate your portfolio something like this:

  • 40% into an S&P 500 fund
  • 30% into a global stocks fund
  • 20% into a bond fund
  • 10% into a Canadian stocks fund

This kind of allocation will give you broad exposure to the global equities market, along with some bond income. Of course, portfolio allocation is never a one-size-fits-all solution. Every investor has unique needs. For custom advice, you should speak with a financial advisor, who will help you find investments that suit your unique circumstances.

Don’t try to time the market

A final tip for getting started with trading stocks is to never time the market. A lot of companies promote courses that advocate for “day trading” in order to make profits on your investments every single day. Studies show that over 90% of people who attempt this fail. Nobody really knows how any particular stock is going to move on a particular day. Nor do they know how ETFs will move, for that matter. Ultimately, the best strategy is to simply buy index funds periodically and hold them until retirement. By doing so, you will outperform almost everybody who tries to time the market.

Foolish takeaway

I started this article by asking how an individual investor can profitably trade stocks. Now, I can end it with a definitive answer:

Don’t “trade” at all. By trading actively, you reduce your total returns. Instead, buy cheap, diversified index funds at regular intervals and hold on to them long term. By doing so, you will outperform those in the market who attempt to “trade.”

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has positions in iSHARES SP TSX 60 INDEX FUND. The Motley Fool has no position in any of the stocks mentioned.

More on Investing

Canadian Dollars bills
Dividend Stocks

3 Monthly-Paying Dividend Stocks to Boost Your Passive Income

Given their healthy cash flows and high yields, these three monthly-paying dividend stocks could boost your passive income.

Read more »

ways to boost income
Investing

Are Telus and BCE Stocks a Smart Buy for Canadian Investors?

Telus (TSX:T) and BCE (TSX:BCE) have massive dividend yields, but their shares have been quite sluggish!

Read more »

investment research
Tech Stocks

Is OpenText Stock a Buy, Sell, or Hold for 2025?

Is OpenText stock poised for a 2025 comeback? AI ambitions, a 3.8% yield, and cash flow power make it a…

Read more »

Make a choice, path to success, sign
Dividend Stocks

The TFSA Blueprint to Generate $3,695.48 in Yearly Passive Income

The blueprint to generate yearly passive income in a TFSA is to maximize the contribution limits.

Read more »

The virtual button with the letters AI in a circle hovering above a keyboard, about to be clicked by a cursor.
Tech Stocks

Emerging Canadian AI Companies With Big Potential

These tech stocks are paving the way to an AI-filled future, but still offer enough growth ahead for a strong…

Read more »

Young Boy with Jet Pack Dreams of Flying
Tech Stocks

Is Constellation Software Stock a Buy, Sell, or Hold for 2025?

CSU stock has long been a strong option for high growth, high value stocks. But are there now too many…

Read more »

rising arrow with flames
Investing

2 Riskier Stocks With High Potential for Canadian Investors in November

Risky stocks such as Well Health Technologies have the potential to provide life-changing long-term returns.

Read more »

hand stacks coins
Dividend Stocks

3 Ultra-High-Yield Dividend Stocks You Can Buy and Hold for a Decade

These three high-yield dividend stocks still have some work to do, but each are in steady areas that are only…

Read more »