Why investing in the markets can be a young person’s game.
If you’re anything like me, the stock market of your imagination is a cinematic flurry of suits-and-ties, practically sweating stocks, waving their arms and frantically yelling, “BUY!” and “SELL!” like Wall Street auctioneers. Trading might seem like the exclusive domain of deep-pocketed businessmen who suffer from perma-bluetooth, but it’s also an option for many people with average incomes. Akin to a fantasy football league for business buffs, playing the markets can be an exciting endeavour for the financially savvy twenty- or thirtysomething, not to mention a smart investment avenue. New investors can reap the rewards of a properly managed portfolio, provided they balance their books and inner financial bravado. Here, we’ve compiled an essential list of to-knows for stock-market virgins on a tighter budget than Joe CEO.
Hot tip #1: Know what the heck a stock is. By issuing stock or “shares,” a company is selling off chunks of its ownership to shareholders in order to raise money to fund its operations. With each stock you purchase, your stake in the company’s profits and assets becomes greater. (If I invest in McDonald’s, for example, I technically possess a microscopic piece of every patty and pickle it owns.) As the company you invest in earns money, the return on your stock will grow, and you’ll make a profit if you sell a stock for more money than you paid for it. The stock market, then, is the arena wherein stocks are bought and sold by shareholders, usually with the help of a broker. “As a company’s earnings increase, investors will have more confidence in it,” says Christine Coverdale, a portfolio manager and chartered accountant with TD Waterhouse.
Hot tip #2: Determine the “why” behind your buys. “You buy stock if you want your money to grow,” says Coverdale, and that’s a good reason if I’ve ever heard one. On average, stocks on Canadian indexes (like the TSX) will yield returns of between eight and 10 per cent annually—a much higher rate than many other investment avenues. (Bonds, for example, will typically only net you about two per cent return.) Provided you’re willing to ride out the market for five years or more, Coverdale believes the stock route will pay off. “It’s like walking up the stairs while spinning a yo-yo,” she says. “There will be fluctuations, but you’re further up in the long run.”
Hot tip #3: Start early. Investors in their 20s and 30s are intrigued by stocks, Coverdale says, because, at that age, people are “more likely to take chances—they’re just at start of their careers and have lots of time to replenish any losses.” While the dynamic nature of the stock market and its potentially high return rates seem tailor-made for young risk-takers, Coverdale warns against the financial pitfalls of youthful naiveté. “A lot of the time, young people have unrealistic assumptions of how their stock will perform. They think a 10 per cent return isn’t good enough—they want 20 or 30 per cent.” If young investors can keep their champagne wishes and caviar dreams in check, and wait patiently for stocks to appreciate over time, they can avoid the burn of initial losses that might spook them into pursuing less lucrative assets, like guaranteed investment certificates or bonds.
Hot tip #4: Do your homework. Doing some background research on the markets, and your own financial situation, is a smart idea. Coverdale says to “ask yourself how much money you’ll need and when you’ll need it. How much can you afford to lose?” Young investors should be aware of their own risk tolerance—whether their financial decisions tend to skew more conservative or aggressive. It’s also wise to put together a mock portfolio and monitor the markets (a.k.a. “paper trading”) before investing real money to give you a feel for what kind of investor you’ll be. “You won’t have the same reaction as if it were your own real money, but it’s a great starting point,” says Coverdale.
Hot tip #5: Minimal money? Try mutual funds. To get your money’s worth from an investment, especially if you don’t have much cash to begin with, Coverdale recommends mutual funds—which basically involves a group of people pooling their money together into stocks chosen by the investors and handled by a portfolio manager. “If you, your best friends, and your mom each have $5,000, rather than each one of you trying to invest on your own, let a professional look after things. You can’t go very far at all with $5,000 on the stock exchange.” You only really need between $100 to $500 to get started, says Coverdale, who also manages a mutual fund on behalf of her four-year-old niece. “We do just $100 per month, and it’s a great way to build up your investment with a small amount of money. It’s more bang for buck.”