At first glance, stock markets can seem scary and overwhelming. Or maybe the idea of trading investments excites you but you don’t know where to begin. Regardless, everyone entering the world of stocks must have the same underlying foundation in order to become successful investors.
First, before entering the stock market, you must ask yourself:
Am I ready to invest?
When investing in Canada, there are age restrictions allocated to each province which determine who can open up a trading account. Before beginning to trade, you must make sure you meet your provincial requirements as determined by your official, government-issued, provincial ID or your residency.
Secondly, you will need a social insurance number. Without this, you will not be able to prove your identity or attach a bank account to your investment platform of choice.
Finally, you must be financially stable before investing your money. Of course, plenty of brave and foolish investors have gambled their sparse financial resources on stocks and come out victorious. However, let’s assume most people won’t be that lucky. Therefore, if you have loans, debt, or are without an emergency fund, it may not be smart to invest in the market.
What does financial stability look like? How can I get there?
Set up an emergency fund
Successful investors and financial educators alike all stress the importance of a ‘capital cushion’ that is going to take care of you for a short period of time should you run into financial trouble. Typically, this should be at least three months’ rent, food, and routine expenses.
Take some time to save up your emergency fund and don’t take anything from it unless you have no other choice.
Eliminate any debt that you have
It is important to minimize your debt before you start trading. Since the practice of trading can be risky, entering the market with some financial semblance is important for mitigating loss.
Open a retirement account
There are a few different ways someone can set up a retirement account. In the US, many people prepare for their retirement with the help of a 401k. These are generally set up through your workplace, functioning as an account that holds investments. Basically, a 401k is a tax advanced retirement account where you put money in, and your company is going to match how much you put in over time, to a maximum amount every year.
The Canadian equivalent is known as a Registered Retirement Savings Plan (RRSP). RRSPs allow you to defer your tax payments on the funds deposited into the account until you eventually use the funds. However, by the time you enter retirement, your taxes will be much lower than the years leading up. Similar to 401ks, there are annual maximum deposit amounts on RRSPs.
The next important Canadian tidbit of information is the integrating of a Tax-Sheltered account. Usually, this account is opened after choosing a platform to trade on. Maybe evident, these accounts will shelter your gains from tax. When it comes to choosing a tax-sheltered account, there are a few options, such as a Tax-Free Savings Account (TFSA) (similar to America’s IRA account) or a Retirement Savings Plan (RSP). Visit a financial professional or do some independent research and find out which is best suited for you. Utilizing these accounts gives us more money to compound.
You understand that investing isn’t a get-rich-quick scheme
When trading stocks, it is important to have a good plan/approach to investing. Furthermore, you do not need substantial capital to invest in stocks. In fact, as a beginner, it is recommended that you start small and manage low-risk investments until you better understand the market and its structures. Furthermore, like all risks, you must be prepared to face loss and maintain a healthy attitude while trading stocks. The variables fluctuate constantly, so if you don’t fare well with inconsistency, this may not be the trade for you.
Now you understand how to prepare yourself to be entered into and be successful in the stock market. What happens next? What are bonds, stocks, and funds? How does investing really work?