A Beginners Guide of Investing in Stocks
Passive income and side hustles are becoming increasingly popular as people are looking for ways to earn some extra income. Investing in stocks is a great way to make some extra money alongside your job, or to put it away for a future nest egg. It’s easy to feel overwhelmed by the stock market as the level of information to absorb can be confusing. What’s the difference between a mutual fund and a dividend? How do you begin investing and where? In the following post, we have covered some of the basics of investing in stocks, and the potential benefits for you. If you’d like to learn more, then keep reading.
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What Are Stocks?
Buying stocks is when you invest some of your money in a company, for future returns when the company makes a profit. Investments are made in companies that people believe will see good profits and success. The aim is that from investing in a successful company, the shareholders will be able to cash out on the profits made either as a regular income or in the future.
What Are The Benefits Of Investing In Stocks?
Unlike having money in a savings account, money invested in stocks has the opportunity to grow and increase in the future. Making wise investments can make your money work for you, so you can focus on other things in life. Stocks, particularly mutual funds, are a passive form of income requiring very little effort from you. Your money can be built in the background whilst you work on your career, family or social life. Investing in stocks has never been easier than in this day and age, and it’s more accessible to everyone due to the online market. You can research, invest, and monitor the stock market and financial forecasts within seconds from your mobile phone or laptop. There’s more education available for understanding how to buy stocks in Canada than ever before, and more people are realizing the benefits.
Why You Should Build A Diverse Portfolio
One of the most important aspects when investing in stocks is understanding how to diversify your investment portfolio. The reason this is important is that investing in only one type of stock can bring a much higher risk of you losing the money you’ve invested. If a certain company or area of the market sees losses or a drop in value in the market, you could end up losing a lot of the money you’ve invested in it. It’s better to invest in many different stocks and companies to spread out your investments, so should one start losing value you have the others to keep your investments stable. It’s common to see fluctuations in the value of stock, but having a broader range in your portfolio can help minimize risk.
Choosing How Much To Invest
As has already been discussed, it’s important to spread your investments to lower the risk of losing large amounts of money if you have invested a lot. It’s also important to make sure you still have savings kept in an account that you don’t dip into for investments. Stocks are not a guaranteed way to build money, and you can even end up losing a lot of it, so you need to keep the money left in savings as a buffer to any unlucky circumstances. Before you begin investing, create a budget plan to portion out the money you feel comfortable using to make investments. Decide which stocks you want to choose, and how much money will be going into each one. Make sure you stick to your plan and don’t be cutting into savings. Consider which way you want to receive your returns on stock investment. Do you want a regular income from it? Or are you investing for the long haul? This will depend on whether you want to receive the money in the short-term as a form of income, or whether you’re investing for your future benefit.
What Kind Of Investor Do You Want To Be?
As well as deciding where you want to invest your money, you should take time to consider what kind of investor you think you may be. However, this will of course come with time as you gain experience with investing and you learn what you enjoy and what works best for you. Do you want to make shorter-term and higher risk investments? Or lower risk, long-term investments? There are benefits and downsides to both depending on what you’re looking for, but generally speaking, most people invest in stocks for the long-term benefits.
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One form of stock investing is dividends. There are quite a few ways to receive dividends as an investor, and it will depend on what form the company chooses to distribute them. You can also choose whether to be a common investor or a preferred investor. Preferred investors generally receive dividends before common investors, and may receive a larger portion, but usually invest more money into the company for the privileges. So what are the different forms of dividends?
1. Cash Dividends
The most common form that dividends take, they are paid out when a company makes an excess profit and can be distributed to investors should the company wish to do so. The amount paid out will be at the discretion of the board members for the company, and they will also choose the date the payments go out.
2. Stock Dividends
An alternative to cash dividends is stock dividends. The company will offer investors further shares in stock from the company instead of cash. This can lead to higher returns in the future for stockholders with larger shares, and higher interest. It also has the benefit of freeing up cash for the company to use for other purposes.
3. Property Dividends
If a company is selling a property or doesn’t have the cash available to pay out dividends, they may use this as a replacement for cash or stock.
4. Liquidation Dividends
The dividing up of dividends to shareholders upon the liquidation of a company, or the changing of ownership. It can be made up of cash, property, stocks, or a mixture of all of them.
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Understanding Mutual Funds
Another common way of investing in stocks comes in the form of mutual funds. This way of investing is popular perhaps due to the fact that the portfolio of an investor can be managed by the mutual fund’s company itself- so very little involvement is required on your part. One thing to consider with mutual funds companies is that they require fees for the management of your investments. Here are some of the most common mutual funds.
1. Fixed Income Funds
This is a good option to choose if you aren’t as interested in the long-term benefits of investing, and would prefer to see immediate returns for the money you invest as a regular form of income.
2. Index Funds
These mutual fund investments follow the fluctuations of the stock market, moving investments to stock that is performing well. The only downside is that it requires a higher level of management by the company handling your investments so comes with higher fees.
3. Global Funds
You can choose to invest internationally rather than just nationally in the form of global funds. Again, this type of investing requires more research from your fund’s manager so may come with higher fees too.
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Where Do You Invest?
Once you’ve conducted your research of the market and have an idea of what stocks you’ll be investing in, you can choose an online broker to invest with. Factor in what kind of investor you want to be. Do you want to be actively involved with it day-to-day? Or more of a passive investor and have someone else do the bulk of the work involved? Look into whether the online broker can meet your needs, and plan out your investment goals as this will help you with choosing the right broker. Do your due diligence to learn how secure an online broker is and the protection for your account. What do the reviews from existing customers say?
Researching The Companies You’re Thinking Of Investing In
Each investment you make if you’re choosing it yourself should be done with plenty of in-depth research first. What is the historical performance of the company? Research their competitors, and how well they are performing in comparison.
If you’re investing over long periods, then you are likely to overcome the costs of inflation. Similar to investing in the right property, investing in the right stocks can bring good returns in the future even with rising inflation.
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As we’ve covered, stocks can be a great investment and can be a great way to earn some extra income or to provide for future financial comfort. However, before you go into stock investing, consider whether it’s right for you and create an investment plan. If you remain level headed and invest wisely, it can be a great decision- but you should always bear in mind that it comes with a level of risk.