Investing, especially as a beginner can be daunting. If you’re new to the stock market or finance, it can be tricky to get started. At Plastk we know how hard it can be to get started on your journey towards financial freedom. That’s why we’ve made it easy for you to learn how to invest like a pro, while learning some key terminology about the stock market.
So how do you get started?
It’s a common misconception that you need to be very wealthy to start investing in the stock market. However, in Canada, it’s very easy to get started, with any amount of money. Whether you have $100 or $100,000, it’s easy to invest if you educate yourself properly.
If you’re in Canada, the easy way to start trading or investing is by transferring some money into your TFSA. If you’re 18 or older, you’ll be able to open a TFSA and start contributing a set amount every year. It’s important to check your contribution limit, to ensure you don’t ‘over contribute.’
At any time in a given year, if you contribute more than your available TFSA contribution limit you will have to pay a tax equal to 1% of the highest excess TFSA amount in the month, for each month that the excess amount stays in your account.
Once your money is transferred into your TFSA, you can begin deciding how you want to invest your money. This means determining if you would like to invest in IPOs, Blue or Pink Chip Stocks, Index Funds or Mutual Funds. These are the three most common investments and are the easiest to get involved with if you are a beginner.
Next, you must understand what a dividend is. A dividend is a portion of a company’s earnings that is paid to shareholders, or people that own that company’s stock, on a quarterly or annual basis. It’s important to remember that not all companies pay dividends. For instance, if you trade penny stocks, you’re likely not after dividends. However, some stocks that do not pay dividends have a better possibility of rapid growth or making a larger ROI (return on investment).
What’s the difference between Blue or Pink Chip Stocks, IPOs, Index Funds and Mutual Funds?
Blue vs Pink Chip Stocks
Blue Chip stocks are what most people think about when they begin thinking about investing. These are the stocks behind large, industry-leading or trustworthy companies. They offer a stable record of significant dividend payments and have a reputation for having positive financial records.
Although these stocks tend to be more expensive, they often offer benefits like dividend payouts, a strong possibility for growth and the ability to safely long-term hold your shares.
Examples of these stocks include Apple ( NASDAQ: AAPL), Air Canada (TSE: AC), or Loblaws (TSE: L).
Pink Chip stocks are slightly different. The term most commonly refers to penny stocks, which are traded at $5 per share or less. These are often smaller companies or start-ups. One advantage to buying penny stocks is that you can buy more shares for your initial investment. While many of these stocks to not pay dividends, their low price makes them a very accessible investment compared to Blue Chip Stocks and their volatility can translate to massive gains if traders make smart trading decisions.
Example: If you wanted to invest $100 and were debating a Pink Chip company and a Blue Chip company there are a few things you must consider.
If the Blue Chip Stock had a price of $15, you would be able to buy approximately 6 shares. While this company would likely offer you a dividend payment every quarter, because you’re only buying 6 shares, you’re limiting yourself by only investing in one company.
$100 investment / $15 per share = 6 Shares
However, if you wanted to invest that same $100 in Pink Chip stocks you’d have more opportunity to diversify your investments. So if you found 4 companies you were interested in that were all trading at $0.50, you’d be able to buy 50 shares of each of the 4 companies.
$100/4 companies = $25 per company
$25 investment/$0.50 = 50 Shares
Spreading your investments between different companies ensures you have additional security, in case anything happens to one of the companies you’re investing in.
IPOs
IPO stands for Intial Public Offering. This is the opening or first price a stock is traded at. This is important to look at because you can see how much a company has positive, steady or negative growth.
Index Funds
An index fund are a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index. These funds follow their benchmark index regardless of the state of the markets. This means they are designed to be a safe investment to protect your money in the instance the stock market crashes.
They are generally considered to be an ideal investment for retirement accounts like 401ks, RRSP or long term savings accounts. The advantage to this investment is taht rather than picking out individual stocks for investment, it makes more sense for someone to invest in an index fund, if they do not want to do extensive research into different companies.
In essence, index funds are a form of passive fund management by your banking institution. Once your money is invested, a fund portfolio manager is responsible for picking and tracking the market, to find securities to invest in and when to sell them. These fund managers then reinvest the profits you make into other securities, to further increase your profits.
Mutual Funds
There are few differences between a mutual fund and index fund. The only difference between the two is that while index funds invest in a specific list of securities (such as stocks of S&P 500-listed companies), mutual funds invest in a changing list of securities.
Index funds invest in a specific list of securities (such as stocks of S&P 500-listed companies only), while active mutual funds invest in a changing list of securities, chosen by an investment manager.
Differences Broken Down
- Index funds have a goal of meeting market-average returns, while active mutual funds try to outperform the market.
- Mutual funds usually have higher fees than index funds.
- Index fund performance is relatively predictable and has steady growth over time
- Mutual fund performance tends to be much less predictable.
- If you hold your investments for a long-period of time, investors may have more opportunity to gain higher returns if they invest in an index fund, as they tend to be ‘safer,’ than mutual funds.
Before deciding which of the above to invest in, you must figure out what works best for you and your lifestyle. If you’re looking to do research on companies that are publicly traded, or want to create a stock portfolio your best investment would be in Pink or Blue chip stocks.
However, if you’re looking for a safer investment, that you can hold for a long period of time, without having to track growth or decline, you’d likely want to invest in Mutual or Index funds.
It’s important to also do research on the times of companies you can invest in, to ensure your money is going towards a trustworthy company or one that has a positive financial history.
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Disclaimer: The content provided on the Plastk Financial Inc. Blog is information to help Canadians become financially literate and learn about credit. Plastk is not responsible for building or ruining an individual's credit score or credit rating. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment, credit inquiries, and all other decisions should be made, as appropriate, only with guidance from a qualified professional.
