Wall Street, Dow Jones, mutual funds, the New York Stock Exchange.More likely than not you’ve probably heard these terms being tossed around in movies, TV shows, the news, or in conversations with family and friends.
But what do all these terms actually mean?
When it comes to the world of investing and trading, it always seems like you’re either in the know, or you know absolutely nothing about it. Luckily if you’re asking these questions, then you’re in the right place! We’ve compiled an easy to follow guide on how to start investing your money in Canada.
Now, this is no get-rich-quick scheme, and you won’t become a millionaire in one day by doing some trading, but this is a great first introduction into the world of finance.
Now let’s jump into the guide.
Jump ahead:
- Savings Accounts
- GICs
- Bonds
- Mutual Funds
- Robo-Advisors
- DIY Investing
How to start investing: The Most Common Ways in Canada
Let’s say you’ve got $1000 dollars to invest. Where can you invest it and what are the risks andreturn?Let’s explore some of the most common ways to invest.
GICS
Similar to regular savings accounts, you invest your money in Guaranteed investment Certificates (GICs) to earn interest over time. The main difference is that your money is locked in for a certain time frame of your choice, but there are also different variations like cashable GICs that offer a bit more flexibility.
GICs are also a very low risk investment, but the added commitment allows you to earn a bit more interest over regular savings accounts – about 1% to 1.5% annually at the time of this writing. With an investment of $1000, you can expect to earn around $10 to $15 of return per year.
GICs can be easily purchased through most major banks and can be a safe way for beginners to start investing.
Bonds
When you borrow money from a bank, the bank makes money off of you by charging you interest on the loan overtime.
With bonds, it’s the opposite. When you purchase a bond, you are essentially acting as a bank yourself by lending money to the government or companies for a set period of time. Over this set amount of time, you will earn interest on the bond and receive your full amount back at the end of the borrowing period.
The annual interest rate for bonds varies widely depending on many factors. Just to give you an idea – anywhere from 0.25% to 8% is possible depending on yourrisk tolerance.
You can buy bonds on most trading platforms and even sell your bond early to other investors.
Stocks
Unlike the investment options we’ve explored so far, the way you earn money from stocks and equity is completely different.
To begin, let’s take a look at what stocks actually are.
When corporations need to raise capital (money) to grow their business, one of the ways they do it is by selling fractions of their company to the public in the form ofstocks or shares. Every time you buy a stock, you are essentially purchasing a share of a company, making you a shareholder.
Each share (or stock) entitles the shareholder to a portion of the business’ profit and assets, and you may also be eligible to vote in a shareholder meeting depending on what kind of share you bought.
So now that you know what stocks really are, how do you make money from them?
How to Make Money from Stocks
There are several ways you can make money from buying stocks of a company.
As an investor, you can make a profit by selling a share at a higher price than when you bought it. For example, if you invested in Microsoft stock back in 1986 when they first went public, and sold your shares today, you would have earned a very pretty penny. Multiply this by selling premium shares purchased from multiple companies over time, you could earn quite a bit of money using this method.
Alternatively, some corporations also issue dividends to shareholders. Dividends are a portion of a corporation’s earnings to shareholders for the risk they are taking in the business.
Because of its volatile nature, investing in stocks is a much riskier endeavour compared to the previously mentioned investment options. In the short term, the price (or value) of your share can fluctuate dramatically. In one day you could see it rise exponentially, and the next day you could see your share become essentially worthless if the company goes bankrupt for whatever reason – making it much more risky when compared to something like bonds.
It’s not all gloom and doom, however. Historically speaking, a well-balanced portfolio of stocks can have a very conservative estimate of 5% return each year over any long term investment period.
This is why it is important to diversify your investment portfolio, especially when you first start investing, to make sure you are not putting all your eggs in one basket to reduce how vulnerable you are during fluctuations in the stock market.
You can trade stocks and equity through mutual funds, robo-advisors, or DIY platforms, which we explain in the next section.
Managing Your investments
So now you know what you can invest in, but how do you go actually start investing? For simplicity’s sake, it can be broken down into three broad categories: Mutual Funds, Robo-advisors, and DIY.
Mutual Funds
Instead of buying and investing in one stock at a time on your own, you can invest your money in mutual funds. A Mutual fund is a pool of money collected from many investors used to invest in a wide variety of different assets like stocks and bonds.
You can buy shares of mutual funds of your choice to match your investment goals and risk tolerance easily.
For example, a high-yield bond mutual fund invests in multiple bonds that offer great returns that come with higher risks; a global equity mutual fund invests in multiple stocks in the US, China, and other international markets; and a balanced mutual fund invests in stocks, bonds, and others.
Mutual funds are very accessible and most major banks will have financial advisors who can help walk you through every step of investing in mutual funds.
Keep in mind that mutual funds are actively managed by a professional manager so you will have to pay a management fee that can range anywhere from 1% to 3% of what you invest and potentially additional fees on top of that.
Robo-Advisors
Robo-Advisors have algorithms that automatically invest in the appropriate mix of assets based on your personalized profile and investment goals with little to no human intervention10.
Its online platform makes robo-advisors a great way for young Canadian investors and beginners to start investing.
Compared to mutual funds, Robo-Advisors are very new as it has only emerged in the recent decade. And unlike Mutual Funds, there are no active fund managers (hence, “robo”) — and therefore, management fees are lower at around 0.4% to 1% of what you invest.
A very popular example of a robo-advisor in Canada isWealthsimple.
Robo-advisors are great, hands-free way to dive into the world of investing.
DIY Investing
DIY Investing, or Do It Yourself investing, is very straight-forward — you invest in assets on your own. You’ll first need to set up an account in a brokerage of your choice. Once that is done, you can place the trades through the brokerage.
You get the most freedom with DIY investing as you can freely choose exactly when and what you want to invest in — whether it’s a specific company’s stock, Canadian government bond, gold, ETFs and even IPOs, you name it.
ETFs will be explained in the step-by-step guide of DIY Investing. Depending on what you invest and what brokerage you choose, you can expect to be charged from $0 (free) to $30 dollars of commission. Management fees are around 0.2% and as low as 0.02% of what you invest.
A popular example of a DIY investment platform in Canada is Questrade.
Which Investment Style to Choose?
So what is the best way to manage your investments? Mutual funds, robo-advisors, or DIY? While this is really up for debate, it really depends on your own personal investment style and personal finance goals.
Management fees should not be the only factor to consider when you’re first learning how to start investing.Ease of investment, additional international market access, foreign currency conversion rates, transaction fees, hidden fees, minimum balance requirement and many other factors should also be considered. This will be addressed in a future article.
But regardless of the avenue you choose, it all takes time to learn so take your time to get to know your personal investment style!
