Playing the Stock Market & Things to Know
Investing directly in the stock market is becoming more accessible to people and while this has its advantages – it also comes with a lot of risk. This blog breaks down what factors to keep in mind when building your investment strategy while also preparing yourself emotionally.
There are lots of reason why you may have a desire to start investing directly in the stock markets:
- You, like many others, have thought to yourself, “If only I had bought Apple stocks in 2003” or “I wish I would have bought into Tesla or Amazon before they took off”.
- You have heard that it’s a way to get rich quick.
- You know of a company you believe is about to “go big” and want in on the action.
- You know of a company that you really believe in as far as what they are building and how they are run.
Whatever the reason is, it’s important that you stop to reflect on your own reason why you want to start investing in the stock market because your motivation will often determine your strategy, and your strategy can impact not only finances, but also the emotions that come along with investing.
Are Your Emotions Prepared to Invest?
This is a good place to start because whether we like it or not, investing in the stock market can be like riding an emotional rollercoaster. Too many people start this journey without any thought or care to the emotional side of investing.
Investing on your own is not for the faint of heart, and having a good “emotional strategy” will be just as important as having a clear “investment strategy”.
To help you understand how your emotions can play a roll, I want you to ask yourself how you might feel at the end of each scenario below:
You open up your investment account and decide to add $1,000 to start off. You then invest your $1,000 in a company your friend told you all about that was sure to go big this year. Within a few weeks of investing you look at the market value of your account to see your money has grown to $1,800. Let’s pause there. Ask yourself, “How do you feel?” I’m assuming the answer is, “I feel pretty good,” or you’re saying to yourself, “my friend’s a genius”. Let’s continue…
After your delight of seeing your account rise, you decide your friend’s advice was a sure win. Around the same time, you are just about to head on a two week camping trip up north. You’ve had no cell service and no way to check your account while you’re away. Upon your return home, you’re looking forward to checking in on your new investment only to find that the market value has decreased to $600. How do you feel?
In the first scenario, people usually have a feeling of euphoria, excitement and general enthusiasm. In the second scenario people share common feelings of despair and buyer’s regret. Buyer’s regret is when you say things like, “I should have sold when my stock was at $1,800” or “Why did I listen to my friend?”
These types of scenarios take place daily, weekly, monthly and yearly whether you’re investing yourself or by other means, the biggest difference is you see it happening more closely. Unfortunately, most people have not prepared for the emotions that come along with investing. Because of this, they begin to make poor investment decisions based on their emotions. Let’s look at one more scenario of emotion-based decisions.
After seeing your stock go down to $600, you decide to wait it out, only to see it drop down to $500 the next week. You figure your friend’s advice wasn’t so great after all and decide to get out while you still can and take the $500 loss from your original investment. You sell your stock and decide to take a break for a few weeks. About three weeks later you open up your account and just out of curiosity, you look at the stock you sold to see it has risen back above your original $1000. The frenzy of emotions that come after seeing this are hard to describe as most people begin reflecting back on all of their decision up to this point.
In this final scenario, buyer’s regret creeps back along with some other emotions. It’s at this point we hope people begin to realize that perhaps making investment decision based on their emotions may not be the best strategy.
Before you start “playing the stock market” I would encourage you to not think about this as “playing the stock market” and start thinking about what your investment strategy will be. Really dive into how you will build a clear investment plan with a clear emotional strategy to go along with it.
Building an Investment Strategy
In this section I will not be outlining any specific strategy to use while investing because every person’s goals are different. What I will talk about are some things to consider as you begin to invest.
#1 Investing vs. Gambling
As mentioned above, the first thing you’ll need to change is your mindset if you’ve been thinking of “playing the stock market”.
The stock market is not a slot machine that you put money into and pull the trigger to see if everything lines up. These are real companies with employees, customers and business strategies. These companies have actual costs with real decisions on how they spend and manage their money. When you invest money into a company, you are investing in every decision they make, every dollar they earn or lose; every employee, every leader.
Unlike a VLT machine, the results are not shown instantaneously but happen over time. Apple, Amazon, Facebook and Tesla were not built over night but over years and years of hard work. Some companies see returns in a few years, some over a few decades.
So the first principle to building your strategy is to ensure the right understanding of what investing means. Ensuring you understand that you are investing in a company not playing the stock market.
#2 Don’t Put All Your Eggs in One Basket
If all of your eggs are in one basket and you trip and fall, the likelihood of all of your eggs breaking at the same time is very high. Putting all of your money in one stock “basket” is risky business. If the stock falls, you may lose a significant amount of money. Now you may say, “but if the stock rises, I could get a high return on my investment.” This is very true, and only you can make the choice, but make sure that whatever choice you make, your emotional strategy is up to the task.
The best advice you’ll hear from almost every financial advisor is to “diversify”. This basically means, “don’t put all of your eggs in one basket”. One of the best strategies for investing in the stock market is to find multiple options/companies to invest in. Some people even look at different types of investments such as technologies vs gaming or health care vs. oil. Another way to diversify is to continue to invest in other ways such as RRSPs and TFSAs.
No matter how you diversify, it’s important to remember principle #1, you are investing in a company. Because you are investing in a company it’s up to you to do your research and set a clear timeline for how long you want to invest.
#3 Research & Timeliness
This is the less glamorous side of investing yourself. When you invest through mutual funds, there are portfolio managers who are trained to do research on companies. Portfolio managers are investment professionals who manage the companies/funds that your money is being invested into and builds diverse portfolios. When you decide to invest by yourself, you become the portfolio manager. It’s now up to you to do research into the companies your investing in. Who is their CEO? What is their business plan? How long have they been a company? What is their five-year strategy? Do they have former success? There are many things to consider and research when choosing a company to invest in so that you can ensure you are aligning your investment strategy to their business strategy.
Once you’ve done your research and feel confident in your decision, it’s a great idea to decide how long you want to invest in the company of choice. One year, five years, twenty years? What business goal(s) are you hoping to see the company achieve during your investment time or what dollar amount are you hoping to see on your return in the future? This time management decision making will help you not lose focus on your goals. It will also help with the emotions that come along with investing. When you’ve put a stake in the sand for five years, you’re more likely to ride through the highs and lows with less anxiety. This will also help you with your decision-making process to be thoughtful versus emotional.
Final Considerations: Platforms, Fees, Advice & Taxes
When I started this blog, I mentioned that investing in companies yourself is becoming more accessible and that is because of the platforms that are available. You may have heard of things like Wealth Simple and Questrade as common names in the world of investing. I would like to make you aware of one more company: Qtrade Direct InvestingTM (Qtrade).
Qtrade is not only the #1 online trading platform in Canada, but it is also a credit union company! Qtrade has a simple way to open an account and allows you to even link your account to your bank for easy processing of fund transfers. Whatever you choose, one thing you should consider are the fees associated with trading (buying and selling) as well as any recurring monthly fees that may exist. Hint: some platforms such as Qtrade offer ways to waive fees.
Once you’ve chosen a platform you may be asking yourself where you could get some advice. It’s a great question and while there is some advice out there, it usually pertains to the platform itself (how to make a trade) and less on strategy (what’s a good company to invest in). Qtrade also offers portfolio analytic tools to help clients make informed investment decisions.
Investing on your own is very much a DIY (do it yourself or learn it yourself) model but sometimes you can pay a fee for added advice. In some cases, you may want to invest in more complicated options and it may be more beneficial to talk to your financial advisor about where you should invest your money. Investing in the stock market isn’t for everybody. At Conexus, we are able to help people with other investment solutions such as mutual funds offered through Credential Asset Management Inc. or even refer people to our wealth management company “Thrive Wealth Management” who are experts in investment advice and solutions. You can also reach out to Thrive directly using the contact us form on their website.
Finally, when you make money, lose money, or break even, you should be aware that there are tax implications that go along with investing. If you make money, you will need to claim it as earnings. Side note: “making money” means selling a stock. If the market value rises but you don’t sell, you’ve made nothing because all that has changed is the market value of your stock. You only make or lose money when you sell your stocks. A basic understanding of investment terms such as “market value”, “buying”, “selling” should be on your priority list to learn if you do not already understand this type of terminology.
If you end up losing money, there may be some tax breaks. In either case, you should be aware that there are tax implications. I would encourage to do your research during tax season to ensure you are filing taxes correctly. There are several tax articles from Qtrade for those who are self-employed, parents, homeowners, investors, seniors, retirees, etc. You can find these articles on their education pages.
I hope this has helped you understand a few things regarding investing in the stock markets and has given you a bit of an outline of things to be aware of, and a few things to help you plan before you take the plunge.
If you’re ready to take the next step, I would recommend opening a Qtrade account. Even if you’re not a credit union member, it’s still a great platform which I use daily. Once you open it up, do some research on the fees, add some money, and then begin to look for the companies you wish to invest in.
Mutual funds are offered through Credential Asset Management Inc. Online brokerage services are offered through Qtrade Direct Investing. Mutual funds and other securities are offered through Credential Securities. Qtrade Direct Investing and Credential Securities are divisions of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc. Qtrade and Qtrade Direct Investing are trade names and trademarks of Aviso Wealth.
When I’m not trying to kick start my musical career, I spend time coaching basketball, helping with my local youth group, and dabble in entrepreneurship. I grew up in the city of Moose Jaw, but love living in beautiful Lumsden, SK. As a valley dweller, I have the best of both worlds, 30 minutes from the lake, and 30 minutes from Starbucks…(Full Bio in “Meet The Authors”)
(To read other blogs by me CLICK my name.)