#MakeItMakeSense is a series from the Star that breaks down personal finance questions to help young Canadians gain more confidence and understanding around financial literacy.
Want to buy stocks? For Canadians who want to start investing, it can be hard finding the right, digestible information when there’s so much out there.
Our question this week comes in from 23-year-old Lea. She says, “I’m trying to understand the stock market and where to start investing is overwhelming. What are some basics on entering the stock market and investing in stocks for a first-timer?”
To #MakeItMakeSense, we brought in money expert Jessica Moorhouse to break it down and give us her best beginner pieces of advice.
What is the stock market and how does it work?
The term “stock market” is something people are often confused by when it’s used in the media or by experts, Moorhouse finds. She clarifies that the term can actually mean several different things.
“They can be referring to the Canadian stock market, the U.S. stock market or the global stock market in general,” she said. “But really, all the stock market means is a collection of stock exchanges in which people trade stocks in a certain country like the Canada or U.S. or a specific region like the European stock market.”
Similar to your local farmer’s market, it’s where people are buying and selling things. The difference is that you’re not buying tangible items, but rather shares of companies.
What should beginners consider before investing in stocks?
Often, Moorhouse receives questions from clients asking her what stocks they should buy, but she says “putting the cart before the horse” — meaning buying without understanding the product or their individual goals — isn’t advised.
Instead, one should take steps before getting involved, Moorhouse explains.
“It’s about laying all that out into what’s called an investment plan. Determining why you want to invest? What’s our goal and how long do you want to have that money invested for? What is your time horizon? What amount of money do you want it to grow into?” she said.
“You need to understand all those factors including your own personal risk tolerance, which is your comfort level in terms of investing.”
Moorhouse says in terms of the psychological pain and anxiety the stock market can bring, people should consider if they are OK with the volatility.
For example, if you invest in a portfolio that has a high ratio of stocks or is just 100 per cent stocks, there will be big up and down swings.
On the other hand if you choose to put fixed income or bonds into your portfolio, it lessens the volatility. While you’d be going with more safety, Moorhouse says that you may not receive as high returns.
“It's up to you to determine how comfortable you are with those ups and downs,” she said.
“It’s important to choose the right portfolio for you that is about your personal comfort level so it minimizes the risk of you making a decision that’s counterintuitive to your goal.”
Should I buy individual stocks?
Moorhouse says she wouldn’t recommend beginners to invest in individual stocks. This is because not only can they be expensive, but the goal for a stock portfolio is for it to be diversified.
“You want to invest in lots of different companies, lots of different markets, industry sectors. You want to spread your money around,” she said.
For instance, if a company were to share their profit report and reveal they aren’t as profitable as people thought, then that stock value typically goes down.
“You don’t want to have most of your money in that (one) company because that would mean your whole portfolio would go down,” Moorehouse said.
That’s why Moorhouse says it’s a better idea for beginners to spread your money across different companies, rather than make it more complex for yourself by researching winning stocks and buying expensive shares.
How can I build or choose the right portfolio?
Looking into pre-built options that offer diversification in a simple way like index funds, mutual funds and exchange traded funds, Moorhouse says.
These products already offer a diverse portfolio, investing in numerous companies, countries and sectors. All you would have to do is buy more units or shares of that product or portfolio, she says.
Index funds try to mimic the composition of a market index, she explains, adding a market index is a representation of the Canadian stock market.
For example the S&P/TSX Composite Index is a representation of what the “overall Canadian stock market (like) the major companies, their market capitalization,” Moorhouse explains.
“If you buy a Canadian index fund, that means you’re basically investing in the entire Canadian stock market or pretty much close to it. You’re getting exposure to thousands of companies, lots of different industries and sectors,” she added.
“So you don’t have to try to find all these companies and make your own portfolio. That will take a long time, a lot of research and a lot of money.”
Additional tips from our expert
For those who feel overwhelmed trying to navigate where to start investing, Moorhouse emphasizes to not feel pressured by FOMO (fear of missing out.)
There will always be social media posts and videos online the emphasize rushing to invest in a certain thing but Moorhouse says it’s important to take your time as it’s your own money and specific circumstance.
“Take your time, even if it means waiting to start investing until you feel more comfortable, more educated,” she said, adding you never want to buy or invest your money in something you don’t understand or feel comfortable with.
Moorhouse says beginners should do their own research rather than rely on advice from friends. For those who are looking for informative resources to read, she recommends books like The Value Of Simple by John Robertson, The Little Book of Common Sense Investing by John C. Bogle, Invested by Danielle Town and Millionaire Teacher by Andrew Hallam.
Got a question or scenario that you’d like to see tackled? Reach out to Madi via email madisonwong@thestar.ca and we’ll #MakeItMakeSense.
Jessica Moorhouse is an Accredited Financial Counsellor Canada®, host of the More Money Podcast and founder of financial education company MoorMoney Media Inc.
Madison Wong is a Toronto-based digital producer for the Star. Reach her via email: madisonwong@thestar.ca
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