Basics Of Stock Investment

What Are The Basics Of Stock Investment Every Beginner Needs To Know?

If you’re looking to get started in stock investment it’s essential that you first have a good understanding of it and how to make wise investments. We’ve put together the following guide to teach some of the basics of getting started with investing. We will also cover planning and budgeting, how to choose companies to invest in, and the different forms investing can take. Keep reading to find out more.

Stock Investment Always Has A Level Of Risk

It’s worth noting that all forms of investing hold a level of risk. So if you prefer to have complete control over your savings at all times, investing may not be right for you. If you choose to invest, there are different ways to invest that involve varying levels of risk, which we’ll discuss later. Ideally, you want a balance between risk and the potential for worthwhile returns- whatever you consider those to be. The Canadian stock market can very often be outshined by its huge neighbour, the US stock market. However, there are a large number of Canadian companies that have promising financial forecasts.  

Planning And Budgeting For Investments

Draw up a plan before you begin investing in what you want to achieve either in the short or long term from investing. Are you looking to save up for your retirement? Or do you want to create an additional income stream? Having clear goals and plans in place will help you to stay focused on your investments. Make sure you have a budget plan in place to ensure you don’t dip into your savings too much. Decide on the companies you’re going to be investing in, and how much you’re willing to put into each one. Having a set budget in place will help to stop you from overspending or making unwise investments.

Knowing What Kind Of Investor You Want To Be

As you gain more experience, you’ll begin to learn what kind of investor you want to be, but you should be able to get a good idea just based on your preferences. If you’re willing to invest bigger amounts of money, you could see quicker significant returns if your stocks perform well. But if you’re more of the kind of person to err on the side of caution, you may prefer to invest smaller amounts over longer terms. You could also consider investing in fixed-income funds if you want regular returns as another form of income.

Knowing What Kinds Of Stocks You Want To Invest In

Do plenty of research when buying stocks in Canada, to help you decide which companies you want to invest in. If you had a specific company in mind, you could look into whether they offer shares. Although you may have an interest in a particular sector, try and branch out into as many different sectors as you can to help diversify your portfolio and lower the risk of your investments. If one sector should see a big drop in the market, the investments made in other companies will help to lessen the financial impact for you.

How Much Money Is Needed To Begin Investing?

With most online brokers, you can begin investing with as little as $1, but how much you are willing to put in is entirely down to you and what you feel comfortable with. It will also depend on the type of investments you want to make. If you’re investing in a mutual fund, there will be larger fees involved as you won’t be directly managing the investments yourself.

Investing In Dividends And Mutual Funds

Dividends are a portion of the profit a company makes that gets distributed out to shareholders regularly. The date and amount vary according to the company, and whether you’re a preferred or common investor. The company may also choose to use profit elsewhere in the company, so could distribute dividends in another form rather than cash. This could include:

  • Stock dividends- further shares in the company
  • Property dividends- ownership of property or profit from selling property
  • Liquidation dividends- if a company is being liquidated it may distribute dividends in various forms

Dividends are good for those who want lower risk as they tend to be less volatile than some other ways of stock investing. 

Another option is mutual funds. This type of investing involves you paying fees to a company that will manage your investment portfolio for you and pool your money together with that of other investors. There are several different types of mutual funds, including:

  • Equity funds- tend to focus on a specific area of the stock market and follow your specific investing style
  • Fixed-income funds- returns are paid out regularly as a form of income rather than a long-term investment
  • Balanced funds- a mixture between equity funds and fixed-income funds
  • Global funds- investing internationally rather than just in your home country

Market Capitalization

Market capitalization is the total dollar market value of the stock a company has on the market. You can work this out by multiplying the number of shares a company has by the market price of a share in the company. It’s essentially a way to work out a company’s value in the stock market. Companies are then divided into three groups, small, medium, and large, depending on the value they have. Market capitalization makes it easier for investors to make judgments on placing their investments. As an investor, it is a good idea for you to choose to diversify your investments over the three groups and vary the kind of companies you invest in to reduce risk.

Emotional Investing

Sometimes our emotions can get in the way of good investing logic. When investing factor in the long-term goals you have, and what it is you’re trying to achieve from investing. Although it is important to keep an eye on your investments, you should try not to become too focused on them as this could lead to emotional investing. Emotional investing usually happens when an investor sees a stock they’ve got shares falling in value, panics, and withdraws their shares. They could then later see the value going back up again but now it’s too late, and they have potentially lost out on good returns in the future. The stock market fluctuates a lot, and you will inevitably see stocks rising and falling in value. The key is knowing when to hang in a little longer in case you can see the fluctuation through. However, it’s also true that investors can be overly optimistic and see the potential in stocks that are unlikely to bring good returns. It’s one of the trickiest things to master when investing in stocks, but if you can overcome your emotions and focus purely on the logical data, you’re more likely to succeed. 

Beginning Sooner Rather Than Later

If possible, it’s best to start investing in stocks as early as possible so that you can see the maximum benefit from your investments. You’ll see higher returns over longer periods provided your stocks perform relatively well. You will also have had the opportunity to build up more compound interest. 

Utilizing Compound Interest

Compound interest is interest earned on interest. It is essentially a reward for having reinvested interest back into a company rather than taking it out. The longer you invest money in a company and build up regular interest. The more compound interest you’ll earn and the higher your future returns.

How Inflation Can Benefit Investors

Over the long term, investing in stocks can help combat inflation. This is due to inflation causing the price of shares to rise as companies have to raise the cost of products to overcome other running costs. Meaning the investments you make now could be worth a lot more in the future simply from inflation. 

Patience Is Key

Unless you’re investing in fixed-income funds or something similar that pays out regularly, you’ll likely be waiting a long time to see the benefits of having invested in stocks. if you like instant gratification, stocks may not be for you, it’s a waiting game. You plant money where you think it will grow best, and then you engage your patience and wait for it to grow. 

Influenced Investing

Something to avoid when investing is being influenced by the media and social channels. You may follow people on social media who always have tips for the “best” stocks to invest in right now. But you need to be careful with following any guidance like this. Take everything you see or hear with a pinch of salt. It’s good to stay informed, but that doesn’t always mean you’ll see the wisest stock investments in these places. 

Bigger Companies Don’t Necessarily Have The Best Stock

You may assume that some of the biggest, longest-developed companies will be a better bet than younger, lesser-known companies. But this isn’t always the case and many investors have made huge returns by investing in the right young, new companies. This does however potentially come with more risk so as mentioned earlier, that’s why it’s important to diversify over different size companies with different market capitalization. 

Author Bio – Mashum Mollah is a Fintech entrepreneur and passionate blogger. He is on a mission to help small businesses grow online. He shares his journey, insights, and experiences with Finance Team. If you are an entrepreneur, marketing professional, or simply an info-cholic, then this blog is for you.

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