How to Buy Stocks for Beginners
Between February and March 2020, the stock market declined in value at the fastest rate in history, with most major markets declining over 30%. Meanwhile, another record was being set through Google’s search engine. People around the world were looking to take advantage of the decline in stock prices and searching “how to buy stocks.” The following graph shows the stock price of a group of global stocks in blue and the relative search rate for “how to buy stocks” in gold.
Sources: Yahoo Finance adjusted closing price for VTI, a major exchange-traded fund (ETF). Google Trends.
The media has referred to the pandemic and its impact on the stock market as a generational opportunity to buy stocks. Before you dive in and buy stocks yourself, I’d like to discuss a checklist of steps to consider and provide a system to help you be successful.
What to consider before buying stocks
Investing in the stock market can help you grow your savings for the future. I’ve spoken previously about how the stock market works and the power of compound growth for your financial future. At the same time, I’ve discussed the risks of investing and why the market declined in value in March. If you want to invest in the stock market, please consider the following opportunities and risks before moving ahead:
Pay off medium to high-interest debt
If you owe money on a credit card or a personal loan that charges 10% interest or more, you may be better off paying down your loan rather than investing.
Create an emergency savings account with 3 to 6 months of mandatory expenses
We have record unemployment in Canada after shutting down much of the economy to slow the spread of the virus. If you lose your job or have an unexpected expense, you don’t want to have to sell your stocks at a potentially lower value.
Don’t invest money you’ll need in the next few years
While the stock market has historically been a great way to build wealth, it takes time to do so. There’s no guarantee the stock market will be higher in a year or two than it is today. Therefore, it’s dangerous to invest money that you can’t afford to lose, or that you’ll need in the next few years.
Avoid buying individual stocks
Our brain is wired to be terrible at buying individual stocks. We’re driven by emotion and make decisions using shortcuts. As a result, a more dependable approach is to invest in a broad range of companies rather than trying to pick and choose the winners.
If you’re in a stable financial situation and are looking to invest your money in the stock market, we’ll discuss your options and systems you can put in place to be as successful as possible.
Opening an account to buy stocks
Investing in the stock market has never been easier. You can open a brokerage account with any of the major banks or a digital service provider. Here’s a list of options with rankings to help you get started. You’ll need to decide whether to open a Tax-Free Savings Account (TFSA), a Registered Retirement Savings Plan (RRSP) or a non-registered account. If you don’t already have a TFSA and an RRSP, you’ll likely want to use one of these. We’ve covered the differences between the two account types previously.
Once you’ve opened your account, you have the option to invest in individual stocks or a bundle of stocks through an exchange-traded fund (ETF) or mutual fund. Purchasing an ETF that bundles a bunch of stocks together for you is the easiest way to take advantage of the stock market’s future growth without much overhead. The Canadian Couch Potato has been providing ideas to invest in a low-cost, hands-off approach for years.
Creating a system to buy stocks
If you want to invest in individual companies with a portion of your money, there are important steps to consider.
Managing your emotions is critical
Fear and greed can overtake your rational thoughts in a second. You may have invested based on sound research, and then if the stock drops in value, you could panic and sell, locking in a loss. Also, if your investment increases in value, greed may overtake you, and you may invest more of your money than you should, assuming it will continue to go up.
Create a system to help you avoid emotions and rash decisions
Before you buy a stock, you should know the following:
Why you’re buying it (e.g., why do you believe it will increase in value in the future).
When you’ll sell it (e.g., once the company successfully launches a new product, once the stock increases in value by 30%, if the stock drops in value by 20%, if the future outlook for the company declines significantly).
Avoid the belief that anything “has to happen,” there are no guarantees.
Once you’ve developed a system and decided what companies you want to invest in, it’s a matter of:
Logging into your brokerage account you opened earlier and depositing your money.
Finding the stock symbol for the company (e.g., Apple’s stock symbol is AAPL, Walmart’s stock symbol is WMT).
Investing your desired dollar amount into shares of the company (e.g., if you want to invest $1,000 in a company and its shares cost $20, you will buy 50 shares).
Following your system without deviation. If you said you’d sell at a set price or after a specific event, it’s important to stick to your plan. The more you allow your emotions and shortcut decisions to drive your investments, the more you’re at risk.
With most brokerage companies, you’ll need to pay a fee of ~$10, called a commission, each time you buy or sell a stock. Most brokerage companies have how-to guides or videos to teach how to invest in stocks on their platform. If you need further help, you can always speak with a contact representative by email, chat or phone.
Closing remarks
After years of academic training and practical experience investing in the stock market, I can assure you that emotions are challenging to overcome. There are tens of thousands of individuals around the world who dedicate their lives to investing in the stock market. They have advanced computing capabilities and access to proprietary data. Even these individuals have difficulty earning better returns than the overall stock market. If you want to grow your money for the future, I’d encourage you to consider a simple, low-cost investment in an ETF that bundles thousands of companies together. Once that’s done, forget you bought it and avoid looking at your investments. Building wealth takes time and patience.
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