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A simple guide to investing for newbies

You've heard "investing" can help you build wealth. So where do you start, and how? We break down the basics.
Thinking about getting started in the world of investing? For Canadians new to investments, these simple tips and explanations can make building wealth a little less intimidating.

You’ve probably heard that investing is one way to build wealth passively, but you do not know how or where to start. For anyone who has never dabbled with investing, it may seem like a very complex endeavor, but it does not have to be.

A couple of years ago, retail investors did not have easy or direct access to financial markets or investment platforms. However, in recent times, the investing process has been simplified. This guide explains the basics of investing and how to get started.

What is investing?

Investing means putting your resources into a venture or product and expecting gains or returns. When it comes to the world of finance, investing is the act of buying financial assets that can appreciate or yield income.

The most common financial assets you can purchase are stocks, bonds, and fixed-income securities. Other non-conventional investment assets are commodities, real estate properties, and crypotcurrency.

Common financial assets

Stocks: Stocks are shares in a company. When you buy a company’s stock, you give that company your money in exchange for ownership of the company. As the company grows and earns profit, you can also make returns through dividends or capital gains —when the share price increases.

For example, assume you purchase a company’s share for $30. If in three months, the share price increases to $35, the value of your share increases. You will have a $5 capital gain when you sell your share.

Stocks are risky assets because a company can go bankrupt, or its share price can decrease.

Bonds and Other Fixed Income Securities: Bonds provide a way for investors to lend companies and governments money in return for interest and the principal after a fixed period.

Fixed income securities are considered relatively safer than stocks or other complex investment assets.

Real Estate: There are various ways to invest in the real estate market. You can buy real properties such as land or houses and sell them at a higher price or earn rental income over time. Real estate investments also include passive assets such as real estate investment trusts, also known as REITs, and real estate funds.

Commodities: Commodities sold on the financial markets include oil, gold, agricultural products, or other precious metals. These assets yield returns when the value you purchased them for increases over time. Like real estate investing, you can invest in real commodities directly or through other financial securities linked to the commodities.

Some financial securities are simple and basic, and others are not. For example, you can invest in exchange-traded funds (ETFs), mutual funds, or index funds. These funds are usually a combination of various stocks, bonds, or other financial securities.

How to invest in the financial markets

Generally, to start investing, you need to buy financial securities through a financial institution or a brokerage.

You can walk into any bank or call a financial institution through the phone to ask about their investing options. Financial institutions give you various investment products and assets to choose from.

When you invest through a bank, you will pay fees to the investment managers who help you buy and sell financial securities and manage your investments.

Investing tip 1: Investing can be risky, and you can lose money. Always research before you buy any financial asset or invest through any financial institution.

You can also invest through an online brokerage. Online brokerages in Canada are TD Direct Investing, National Bank Direct Brokerage, RBC Direct Investing, Wealthsimple, Questrade, and Qtrade. Most online brokerages charge you commissions and fees to buy and sell financial assets such as stocks, bonds, REITs, or ETFs.

Registered investment accounts in Canada

The Canadian government taxes you when you invest and make capital gains or income. However, the government has created savings and investment accounts that allow you to defer or avoid taxes.

Types of tax-advantaged registered investment accounts are the tax-free savings account (TFSA), registered retirement savings plan (RRSP), and registered education savings plan (RESP).

You can buy allowable financial assets such as stocks, bonds, mutual funds, and ETFs through these registered accounts.

When you open a tax-free savings account and invest through your plan, your investment earnings are tax-free.

Investing tip 2: Registered investment accounts in Canada have rules and limitations. Learn more about them and comply with the guidelines to avoid penalties and tax implications.

The registered retirement savings plan allows you to save for retirement and defer taxes until you withdraw from the account.

You can use the registered education savings plan to save and invest for post-secondary educational purposes.

Investment risk and returns

Investing involves risks. Risky assets usually have the potential for higher returns, but you also stand a higher chance of losing your money. You need to invest in assets that meet your risk appetite and allow you to achieve your financial goals.

Investing tip 3: Diversifying your investment portfolio helps to manage risks and minimize the impact of financial losses. Diversifying your investment portfolio means you buy different assets or invest across various industries and locations.

Investing can be a wealth-building tool if done right. Ensure you consult a financial expert to help you on your investment journey and get helpful resources on the internet to broaden your investing knowledge.