Investing in the stock market is something that I believe every Canadian should do. It’s a way for the everyday person to achieve financial independence. Unlike other forms of wealth creation, the stock market offers a very low barrier to entry. That means you could get started today even with very little capital. In addition, there are a lot of excellent resources out there, like The Motley Fool, that you can use to learn how to invest in the stock market properly.
However, the entire process can be daunting to those who are new to the market — especially because we aren’t really taught anything about investing in schools. Fear not! In this article, I’ll walk you through how I think new investors should approach the market.
Don’t wait; start today
Don’t wait to start investing. Even if you only have a little bit of cash on hand, it would be a great idea to start investing as soon as possible. This is because you’d be making use of your greatest wealth-creation tool: time. It’s often said that time is the best compounder of wealth. Indeed, it’s been shown that time in the market is more important than timing the market. In my opinion, as long as you take a long-term approach, any time could be a good time to enter the market.
If you’re unsure of what stocks to buy, you can get started by looking at low-cost index funds. These funds are often called exchange-traded funds (ETFs). They tend to differ from the mutual funds that your banks may offer investors because ETFs tend to track indices and are passively managed. In short, they try to mimic the performance of a certain index, instead of aiming to beat the market. Because of the passive management associated with ETFs, investors aren’t subject to as many fees.
Invest in businesses you understand
Whether you choose to invest in ETFs or individual stocks, it’s essential that you only invest in companies you understand. For example, if you have a particular interest in technology companies, perhaps you can take a look at a technology-orientated ETF.
The reason you want to follow this rule is because stocks tend to fluctuate over time. During times when your position is lower in value, it would be a good idea to read up on the company to see if you can pinpoint any possible reasons why the stock is the way it is. If you’re unable to understand the inner workings of the company, then you could become very uneasy holding shares in that company and end up selling at bad times.
It’s very easy for new investors to fall into the trap of buying shares in a very popular company even if they haven’t taken the time to properly vet that business inside and out. In my own personal portfolio, I have pledged to invest only in companies that I can explain to a family member since it shows that I really know what that company is about.
When looking for your first stocks, think of the companies you interact with on a daily basis. This could be your bank, the computers you use, or your phone. I think these companies would be great to start with since you already know how that company makes money and that there’s a demand for the products and services they provide.
Foolish takeaway
Investing is something that all Canadians should do. It’s a great way for the average person to create sustainable wealth. New investors should take a long-term approach and focus on businesses they understand. Following those guidelines, I believe you could be well on your way to financial independence.
