10 Things Every Stock Market Investor Needs to Know
A common piece of advice for those looking to build wealth through a diversified portfolio is to include stocks in their portfolio. Stocks are relatively easy to understand and almost anyone can get started with stock investing. The reality of stock trading is that a lot of people end up losing money for a variety of reasons, usually a lack of basic understanding and research. The good news is that you can minimise losses by understanding a few things about stock market investments.
Never Invest in Companies You Do Not Understand
A fatal mistake new investors make is investing in companies or industries they do not understand. This is a bad idea because when you do not understand the company, it becomes harder to make informed decisions about your investments. It also gets harder to understand how external changes and factors will affect the price of a stock and you might not even know when to exit the market if something that will decimate your position is coming down the line.
A few things to investigate before investing in a company are what it does, what services it offers, what countries it operates in, how their products and services are doing in the market, whether they are a leader in their industry or market and so on.
Fortunately, all the information you need to know about a company or industry before investing in its stocks is easy to find. You can visit the company’s website or do some research online.
Think Long Term
For the average stock investor, it is a terrible idea to think and trade short term. It can be done once you have enough experience in the market, but it is better left to experienced or automated traders. For the average person, it is better to think long term.
There are lots of opportunities you can take advantage of when you look ahead and enter a market when the conditions are right. For example, proficient stock investors wait for opportunities where a company or industry is neglected due to a bad stretch or some incidents at that company or in their industry. When you are sure that the industry will rebound, like what happened to the housing market after the last economic crash, then you know there will be opportunities down the line and the best time to invest would be when the market is down.
Diversification is Key
In the worst-case scenario, you want a failing stock to be only a small percentage of your investment portfolio. Consider when a stock price falls by 90% – it has happened before – and it is 50% of your portfolio. Now think what would happen if that stock was 5% of your portfolio.
Diversification allows you to not only have specific stocks be a small percentage of your stocks, but it also ensures your portfolio remains strong, held up by the other stock options in your portfolio. This means that in the scenario above, you would still be in a profitable position if your other stocks were still going strong.
One of the best ways to diversify your stock portfolio is investing in ETFs (exchange traded funds). These funds contain dozens of stocks, sometimes holding hundreds of stocks. This ensures that no single stock is a significant portion of your portfolio and you’re shielded when one or even a handful of stocks are not doing that well.
For beginners who want to learn to buy stocks and ETFs, WealthSimple has a great guide on how to go about it. WealthSimple provides beginner and experienced stock market investors with the tools they need to invest, make and grow money. From their automated investment services to their WealthSimple Trade tool that enables commission-free stock trading, you will find everything you need to invest here. They also have humans standing by to help with any questions, issues or concerns you have with stock or cryptocurrency investments and reading.
Stock Dividends Offer a Great Income
Investors who are looking to park their money and earn an income on their stocks should consider stocks that have dividends. Dividends are decided by the company and paid out depending on the company’s decisions and policies. Apart from the extra income they afford you, dividends do not usually decline as much as stock prices do. This means that while a stock may fall by, say, 10%, the dividend payout may decline by 1-3%. This means that dividends can offer a level of insulation that stocks alone do not.
One thing to keep in mind is that you should be overly cautious of businesses and companies that offer a dividend that looks too high. This usually happens for new companies who want to attract investors and then cut their dividend payouts later.
Your Profit Might be Subject to Taxation
Of the three main ways of making money investing in stocks, capital gains, dividends and interest, capital gains and interest income will be taxed by the government while dividends are usually not taxed. Capital gains are profits made when the price of a stock you bought increases in price. In Canada, investors have to pay capital gains tax on 50% of the gains made on a stock depending on the taxation rate in their province or territory. So, if the value of your stocks increases by CAD$1000, you will pay capital gains tax on 50%, or CAD$500. 100% of your interest gains are taxable while dividends are 0% taxable. This means that when investing in stocks in Canada, it would be better to lean on stocks that have a dividend or capital gains income than those that have interest tied to them as the relative amount of taxation on interest income is a lot higher.
Think Long and Hard About Broker Advice
Because you cannot purchase stocks directly from a company, you have to go through a broker. When you do, the broker will offer you advice and attempt to get you to sign up for as many of their services as possible. These can include regular stock updates and suggestions, advice and guidance. Sadly, some brokers don’t care enough about their investors and offer advice that benefits them, mainly through getting you to sign up or use services that cost money.
While there are a lot of great brokers who offer great advice and services, it is important to think long and hard before you sign or sign up for anything. Do extensive research, understand the market, analyze everything you are told and then weigh the advice offered by your broker. This is one of the best ways to ensure that an unscrupulous broker does not bankrupt you.
Have a Strategy
If you are using an automated service or having a broker do the trading for you, that is great. However, if you want tighter control of your stock investments, you need to have a solid strategy that dictates when to buy or sell, what to buy or sell and how to track your trading and investing progress. Investing in and trading stocks without a solid strategy will not isolate you from the noise in the stock market, and there is lots of it.
Devising a strategy will often lead to trial and error, and lots of mistakes come with it. This is why the next thing investors need to know is to start small.
If you have been investing in and trading stocks for a while, then you are at liberty to invest as much money as you are comfortable with. However, if you are just starting and refining your strategy as we have discussed above, you should start small.
A smaller amount gives you a lot of leeway to experiment and take bigger risks while refining your strategy. Once you find what works for you, you can then begin investing large sums following a refined strategy. This is a much better way to invest in stocks than putting all your money in without a solid strategy or an understanding of how it all works.
Invest In Education
If you want to be a better investor, you need to invest in your education. Fortunately, there is no shortage of information about investing in stocks, making money and securing your future through these investments. Education will also minimise the chances of mistakes when large sums of money are at play. In addition to books and online resources, it is also a great idea to listen to and follow some stock investing professionals like Warren Buffett who have great advice on investing in stocks and gaining in the long term.
Investing in Stocks is Risky
One last thing that every stock market investor needs to know is that investing is risky. There are no guarantees and there is always the chance to lose money. However, with proper education, patience and an understanding of the stock market, it is possible to minimise losses and make money in the long term.
Investing in the stock market is a great way to make money in the short term, and securing your future in the long term. If you follow the tips above, this should be possible for you.