Do you have money sitting idle in your savings account? Perhaps you like it that way because it feels like it gives you some peace of mind. However, this is one of the worst things you can do with your money.
According to Camille Gaines, founder of Retire Certain, you don’t want more than two months of living expenses in your savings account. This is because most money market accounts give you at least 5% interest which is better than nothing.
When you factor in inflation and the rising cost of commodities, if your money isn’t being invested, it’s essentially losing its value. Trading stocks in Canada can seem a little tricky to get into if you’ve never considered it before. After all, when compared to America, Canada simply lacks the same amount of volume, liquidity, and size of companies.
In this article, we will explore what you need to know if you intend to get into trading on the stock market. Let’s dive in.
1. Educate Yourself on the Basics
A common reason people get turned off from investing is the sheer number of options and choices you have to make. What makes it tougher is that without a mentor, you end up getting so much conflicting advice online.
To make it simple, let’s briefly look at what you should start researching. You have a number of different investment products like fixed-income securities, guaranteed investment certificates (GIC), and exchange-traded funds (ETF).
Ultimately, the first choice you will end up running into is whether to pick shares or GICs. You will need to deliberate on this carefully. With GICs, your principal is guaranteed which means you aren’t going to lose your initial investment. This is because they are protected by the Canadian Deposit Insurance Corporation.
With shares, it gets a lot more riskier because their values fluctuate, either increasing or decreasing in value. Yes, that can make it attractive but your principal investment is not protected. The obvious issue here is that you can lose it if the market isn’t in your favor.
2. Understand Investment Strategy
If you thought that investing in the stock market was as simple as “buy low and sell high,” this point is for you. Investment strategy is basically the foundation upon which everything else relies. You can find tons of information online about strategy, but the point is that the strategy you pick should be tailored to your goals.
Trying to copy other’s strategies is a bad idea because they might have a completely different appetite for risk. Their goals may be more long-term and that can drastically impact the kind of returns you get. So, just be careful and really think about what your priorities are.
With that being said, you can learn a lot online about the different tools and aides to help you with investing. The candle pattern cheat sheet is one tool that many traders use to great success.
ValueTrend explains it in simple terms. A candlestick pattern indicates bullishness, bearishness, or potential trend reversals. Traders and investors use cheat sheets like these to condense information in a more compact format. There are many more such tools that you can take advantage of to make your trading and investing simpler and more efficient.
3. Understand and be Aware of Tax Implications
If you are day trading on a consistent basis, the income you generate is considered regular income and not capital gains. This is an important point to be aware of because capital gains have a lower tax rate in Canada. So what does this mean? Well, the common mistake that new traders make is using a Tax-Free Savings Account (TFSA) for day trading.
This is a mistake because the TSFA is meant to give you tax advantages on capital gains. However, when your income gets reclassified as regular income because of frequent trading, you lose the benefits. It also puts you into a tricky tax situation. No one wants unexpected tax bills at the end of the year!
So if you are going to be trading frequently, your safest option would be either a margin, a cash, or an FX account. Many traders learn this the hard way, but now you know what to do.
To wrap things up, it’s fantastic that you are thinking about trading and investing. More than any of the mistakes listed in this article, the biggest one that people make is failing to invest early. This is especially the case when you consider the power of compounding. Avoid putting on blinders as you start on this path and try to remain open-minded.
The most successful traders and investors are people who understand the importance of constantly learning and adapting. Thankfully we live in the age of the internet and there’s no lack of good knowledge just waiting to be explored if you know where to look.
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