Why Learning to Invest is Your Key to Financial Success

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In school, we are taught various pieces of material, ranging from mathematical concepts to english literature (depending on your concentration of study). However, one topic that should be discussed more in schools is investing in the stock market. The stock market is not only a way for individuals to choose between a plethora of companies to invest in but can allow individuals to grow their savings while offering protection from taxes and inflation; if done correctly.

In this blog, I will cover the importance of investing, various types of stocks, the different financial accounts used to invest, and the strategies I believe are the best to follow while investing in the stock market.

Why is Investing Important, and When Should You Invest?

When the topic of investing is brought up to many, their first reaction is usually “I’ll invest later” as it is a challenging thing to learn which requires discipline and focus. What most fail to realize is the earlier you build a habit to invest, the less you will have to contribute later on. By having a regular routine of investing, you will benefit from compounding, which will work to your advantage as the amount invested will grow substantially. At the same time, you earn interest and dividends as the value of your shares appreciates.

Types of Stocks

Before diving into types of stocks, it’s essential to understand what a stock truly is. A stock is a share of ownership in a company; for example, imagine a whole pizza being a stock, and each individual slice in that pizza represents a share of the company, and each share bought is a portion of ownership of the company. There are a variety of types of stocks to choose from when investing, but there are two that I will focus on today: Common share and Preferred share stocks. These stocks contain various benefits but are also considerably different from each other.

Common Stocks

Common shares (stocks) are a form of ownership (equity) investments; in other words, they are tradeable assets that showcase your ownership of the company attained by purchasing shares of the company. An example would be an investor owning 100 shares of Apple’s stock (AAPL) at a Market price of about 192.53 USD (at the time of this posting). Owning these shares would make the investor a partial owner of Apple; if the company performs well and the company value increases, the market price of the stock may also increase. If the investor initially bought the stock for $192.53 a share, and the share price later skyrockets to $291.53 per share, yielding a $100 increase, the investor could sell their company shares for a profit. Common stocks come with many benefits, such as capital growth, dividend income and voting privileges.

Capital Growth

Capital growth, also known as capital appreciation, is the increase or decrease of the price of an investment or asset over time. In terms of stocks, this means there could be a growth or decline in the market price of a stock from the time of purchase, allowing shareholders to sell their shares at a higher price than initially paid to gain a profit.

Dividend Income

Dividend income is a form of income that an investor will receive from a company for owning shares of the company’s stock. When the company makes a profit, the company can choose to issue a portion of these profits to their shareholders in the form of a dividend. These payments are usually handed out regularly, such as at the end of each quarter (quarterly) or at the end of the year (annually), and are paid in the form of cash or shares of stock. Dividend payments also have a benefit of their own as all dividend income and capital gains are taxed at a lower rate than employment income and interest income from bonds or GICs.

Voting Privilege

Owning a share of a stock comes with voting privileges; this means that shareholders will have the ability to vote on some issues within the corporation. Voting rights may vary depending on the company and the class of shares owned.

Preferred Shares

Preferred stock is a component of a company’s equity that can contain a combination of features not seen in common stock. This can include both aspects of equity and debt instruments.

Preferred stocks are quite different from common shares in various ways; they contain a higher claim on a company’s assets and earnings when compared to common stocks. Preferred shares also provide a reliable stream of income, higher income, and variety.

Reliable Stream of Income

Preferred stocks come with fixed and higher dividend amounts; these dividends are usually set at a specific rate and must be paid out to holders of the preferred stocks before a company can pay out their dividends to common shareholders.

Higher Income

Compared to common stocks, preferred shares yield higher dividend payments and come with the same tax advantage that dividends paid through common shares receive.

Variety

There are many different types of preferred shares, each containing different characteristics. For example, some preferred shares allow for unpaid dividends to accumulate, while others can be converted into common shares.

Financial Accounts

There are various financial accounts that individuals can use to invest depending on their financial goals, preferences, and risk tolerance. Here are the most common ones used today.

Tax-Free Savings Account (TFSA)

A TFSA is a savings account that allows Canadian residents over 18 to set money aside tax-free! It provides tax benefits for saving and investment income, including capital gains and dividends. In most cases, earnings in a TFSA are not taxed even when withdrawn.

Advantages: Investment income and capital gains are tax-free; withdrawals can be made at any time without being taxed

Disadvantage: There is a yearly contribution limit, and anything over that limit may result in penalties. For example, if your contribution limit for your TFSA is $8,000 CAD yearly, and you contribute $9,000 CAD, that contribution will be subject to penalties since it exceeds the initial $8,000 contribution limit.

Registered Retirement Savings Plan (RRSP)

An RRSP is a registered retirement savings plan, an account that can be used to hold savings and investment assets. RRSPs contain numerous tax advantages compared to investing outside of non-tax-exempt accounts.

Advantages: Contributions are tax-deductible, which reduces your taxable income, and investment income will be grown tax-deferred until withdrawn. Moreover, RRSP contributions can result in a tax refund.

Disadvantage: Your investment income is taxable, and capital gains are taxable when stocks or investments are sold.

Online Brokerage Platform Accounts

These are investment accounts on online platforms where you can purchase investments such as stocks, bonds, ETFs and much more. You can add money to brokerage accounts like a bank account and buy your investments. These accounts have no contribution limits or withdrawal penalties. A good online brokerage platform I recommend is Wealth Simple, as it is an easy-to-use platform offering commission-free stocks and ETFs.

Advantages: It provides an online platform for self-directing trading of stocks, bonds, and ETFs while providing other securities, giving the investor more control and flexibility.

Disadvantage: These accounts require more active management and research and may charge a transaction fee for purchased stocks.

The Best Strategy to Begin Investing

It is essential to know that there is no “perfect” strategy to start investing, but there are safer ways to start and mitigate risks. However, even though there is no “best strategy” for investing, there are some things to consider.

Research

Refrain from mindlessly investing in the most popular or trending stocks just because they’ve been up a tremendous amount; instead, research and find out what investments you should make that align with your financial goals.

Be Consistent

Investing once or twice won’t allow for proper growth within your investments; consistency with your investments will allow your investments to grow and compound over time. Investments do not require a lump sum of money, but setting up a system such as $20 each paycheque or $100 a month will go a long way in growing your investments.

Be Patient

Stocks don’t grow overnight, and you cannot time the market; the goal of investing in the stock market is long-term growth. Patience allows your investments time to grow and compound over the years; taking advantage of compounding interest will bring back better returns than short-term investing.

In Conclusion

Investing early while being consistent is the best formula to gain the great benefits the stock market offers. Doing your own research, having discipline and patience, and trying to avoid timing the market will create more opportunities for money to be made in the long run. Moreover, consistency will open doors for various amounts of capital growth and dividend payments, allowing you to benefit from investing in the stock market.

About the Author

Evan O:

I am a very dedicated and hardworking student who wants to not only show students the power of creating meaningful connections but also encourage students to break out of their comfort zones, allowing them to explore all the opportunities they can achieve by putting themselves out there.