How to invest in stocks: A Beginner’s Guide
Learn how to invest in stocks step by step. This beginner guide covers research, account types, trading tips, and how to avoid common mistakes.
Updated 
15 min. read
If you want to understand how to invest in stocks, this article will provide a comprehensive guide. We’ll cover everything from understanding if you are financially ready to invest in stocks, how to do basic research, executing your first trade, monitoring your portfolio, and avoiding common mistakes.
What is stock investing?
Stock investing is the acquisition of shares in a company, which means you own a part of that company. This ownership entitles you to a share of the company’s overall value and you can benefit from the growth in that value. The value of your shares may increase, and you could also receive dividends. The flipside is that if the overall value of the company decreases, the value of your shares would also proportionately decrease.
How stocks generate returns
Stocks produce returns in two main ways: price appreciation and dividends. Price appreciation occurs when the value of your shares increases over time, allowing you to sell them for a profit. Dividends are periodic payments made by companies to shareholders from their profits. Both forms of return are important for wealth creation and can help you reach your long-term financial goals.
The role of stock markets
The stock market is made up of exchanges, including the NYSE and TSX, where traders buy and sell stocks of publicly traded companies. These exchanges provide a regulated environment for transactions and help ensure transparency and liquidity. Liquidity, the ability to easily buy and sell stocks, is a key advantage of the stock market, making it accessible for both new and experienced investors.
Risks and rewards of investing in stocks
Investing in stocks requires understanding the relationship between potential returns and risks. Market volatility, or the frequent ups and downs in stock prices, can lead to short-term losses. However, sticking to a long-term investment plan which includes proper diversification of your investments can help smooth out these fluctuations and increase your chances of success. Over time, the stock market has historically provided strong returns, making it a vital part of a diversified investment portfolio.
Types of stocks
There are two main types of stocks that investors can choose from:
| Common stock | Preferred stock |
|---|---|
| Offers voting rights and the potential for dividends and capital appreciation. | Typically provides fixed dividends and priority over common shares in case of bankruptcy but usually lacks voting rights. |
Assessing your financial readiness & investment goals
Before purchasing stocks, it’s crucial to assess your financial situation and set clear investment goals.
Building a financial safety net
Before you start investing, it’s recommended to have a financial safety net. An emergency fund that can cover three to six months of living expenses is essential. This fund acts as a buffer, ensuring you don’t have to cash out your investments during a downturn or personal emergency. For example, if your monthly expenses are $2,000, aim to save between $6,000 and $12,000 in a high-interest savings account.
Eliminating high-interest debt
It may be wise to eliminate high-interest debt, like credit card debt, before pursuing stock investments. The interest on these debts often exceeds the returns you might reasonably expect from the stock market. By paying off high-interest debts first, you free up more money for investing and reduce financial stress.
Setting short-term and long-term investment goals
Establishing clear investment goals is crucial. Short-term goals (less than five years) might include saving for a vacation or a car, while long-term goals (such as retirement or wealth accumulation) require a different approach. Write down your goals and create a timeline for achieving them. This will help guide your investment strategy and keep you focused.
Determining your risk tolerance
Your risk tolerance depends on factors like income stability, investment time horizon, and your ability to handle market volatility. For example, if you have a stable job and a long time horizon, you may be able to take on more risk. If you’re close to needing the money you have invested, a more conservative approach may be appropriate.
Use online tools or take a quick quiz to help steer you in the right direction. If you are still unsure, you can always look at adviceDirect, our platform that provides guidance for investors who want to execute trades on their own with personalized support.
Setting realistic expectations
It’s important to have realistic expectations about returns and market behaviour. Historically, stocks have rewarded investors with returns greater than more conservative investments (like bonds and GICs), but there will be periods of both gains and losses. By understanding this, you’ll be better prepared to remain disciplined during economic downturns.
Dollar-cost averaging
Dollar-cost averaging involves investing a fixed amount regularly, regardless of market conditions. This strategy reduces the impact of market volatility and removes the pressure of trying to time the market. For example, setting up a Continuous Savings Plan (CSP) and investing $200 every month into a diversified ETF can help you build wealth steadily over time.
Considering tax consequences
Investing can have tax consequences, so it’s important to understand how your investments will be taxed. Using tax-advantaged accounts like TFSAs and RRSPs can help you maximize your after-tax returns.
How to research and select stocks
One of the main ways investors determine whether they want to buy or sell a stock is by comparing the stock market price versus what they think the company is worth. This is where fundamental analysis can come in. You can look at the financial information of the company to help guide you. If you find that a company is making a lot of money and profits have been consistently growing, but the share price has recently gone down, you might be more inclined to buy that stock. Conversely, if you think the stock market is overvaluing the company, you might be more inclined to sell that stock.
Understanding fundamental analysis
Fundamental analysis is the process of evaluating a company’s financial health to determine its investment potential. This involves looking at revenue growth, profit margins, and debt levels. For example, a company with steadily increasing revenues and low debt may be a strong candidate for investment.
Key financial ratios explained
These are a sample of key financial ratios that can help you assess a stock’s value:
| Earnings per share (EPS) | Indicates how much profit is allocated to each share. A higher EPS often signals a more profitable company. |
|---|---|
| Price-to-earnings (P/E) ratio | Compares a company’s share price to its earnings. A lower P/E may indicate undervaluation. |
| Return on equity (ROE) | Measures how effectively a company uses shareholders’ equity to generate profits. A higher ROE suggests efficient management. |
| Price-to-book (P/B) ratio | Compares a company’s market value to its book value. A lower P/B may signal undervaluation. |
| Debt-to-equity ratio | Shows how much debt a company has relative to its equity. Lower ratios generally mean less financial risk. |
Evaluating industry trends and competitive positioning
Industry trends and a company’s competitive positioning can affect long-term performance. For example, a tech company with a strong patent portfolio and innovative products may have a competitive edge. Evaluate the management team’s track record and the company’s market share within its industry.
Companies in the technology sector may be expected to be faster growing companies compared to consumer staples companies. Accordingly, P/E ratios for technology stocks may be higher as a group than for consumer staples. So it’s possible that a technology company with a high P/E ratio (compared to a consumer staple company) might still be considered undervalued relative to its peers of other technology companies.
Analyzing historical performance
Reviewing a company’s historical performance, future earnings reports, and market activity can provide insights into its growth potential. Use financial news, analyst reports, and BMO’s Investment Learning Centre to stay informed.
The importance of diversification
Diversification means spreading your investments across different sectors and asset classes to minimize risk. For example, investing in technology, healthcare, and consumer goods stocks can help protect your portfolio from sector-specific downturns.
ETFs and mutual funds for beginners
If picking individual stocks feels overwhelming, consider investing in broadly diversified ETFs or mutual funds. These are types of investment funds that can provide instant diversification by pooling money from many investors to buy a broad range of stocks and other securities.
How to Invest in Stocks: placing your first stock trade
Step 1: Open a brokerage account
To buy stocks, you’ll need a brokerage account. BMO offers both InvestorLine Self-Directed accounts and hybrid accounts like BMO InvestorLine adviceDirect.
Step 2: Fund your account
Once your account is open, transfer funds from your bank account. BMO InvestorLine Self-Directed accounts don’t have an account balance minimum, so you can start investing even with a small initial contribution.
Step 3: Research and choose your investment
Decide whether to buy individual stocks, ETFs, or mutual funds. Beginners often start with a diversified ETF to minimize risk and to get more comfortable with investing on their own, but the choice is yours.
Step 4: Understand order types
- Market order: An order to buy or sell immediately at the current price.
- Limit order: An order to buy or sell at a specific price. The trade only executes if the market reaches your price.
Step 5: Monitor prices, bid-ask spreads, and trading volume
Pay attention to the prices of stocks, the bid-ask spread (the difference between the highest price a buyer is willing to pay and the lowest price a seller will accept), and trading volume. These factors can affect the efficiency and cost of your trade.
Step 6: Place your trade
Now we get to how to trade stocks: Enter the stock symbol, the number of shares, and select your order type. Review all details before confirming your trade.
You can start small
Begin with a small investment in a single stock or ETF. This allows you to learn the process and gain confidence without risking significant capital.
Avoid impulsive decisions
It’s common for new investors to make impulsive buys, especially during market hype. Stick to your investment plan and avoid making decisions based on emotions or trends.
Monitoring and managing your stock investments
Regular portfolio reviews
Checking in with your portfolio from time to time is important, especially against the backdrop of your financial goals and risk appetite. Set a schedule, quarterly or annually, to review your holdings and performance.
Rebalancing your portfolio
Rebalancing is the process of readjusting your investments when individual securities or assets classes rise or fall in order to maintain your desired asset allocation. For example, if stocks have performed well and now make up a larger portion of your portfolio than intended, sell some and buy exposure to other asset classes to restore balance.
Staying informed and making decisions
Informed decision-making entails paying attention to company earnings reports, economic trends, and market conditions. Use the BMO Investment Learning Centre and financial news to stay up to date.
Dividend reinvestment plans (DRIPs)
Dividend reinvestment plans (DRIPs) automatically reinvest dividends to purchase more shares, boosting your portfolio’s growth over the long run.
Maintaining a long-term perspective
Don’t overreact to short-term market movements. Focus on your long-term goals and investment fundamentals. Staying patient and disciplined is key to maximizing returns.
Common mistakes to avoid when investing in stocks for beginners
Emotional decision-making
Letting emotions influence your investment choices is a frequent pitfall for beginners. Panic selling during market downturns or chasing hyped-up stocks can lead to losses and missed opportunities. To avoid this, develop a clear investment plan and make a commitment to stick to it, even when markets are volatile or headlines are alarming. Keeping a long-term perspective helps you stay focused on your goals rather than short-term market swings.
Overtrading
Trading too often can quickly boost transaction costs and taxes, which in turn can eat into your investment returns. Frequent buying and selling is often driven by reacting to short-term market movements, rather than following a thoughtful strategy. To help preserve your gains, limit your trades and avoid making changes to your portfolio unless they align with your long-term investment plan.
Attempting to time the market
Trying to predict the best times to buy or sell stocks is extremely difficult, even for experienced investors. Market timing often results in missed opportunities and added stress, as it’s nearly impossible to consistently guess short-term market moves. Instead, consider using dollar-cost averaging and focus on steady, long-term growth, which is a more reliable approach for most investors.
Ignoring fees
Investment fees, such as trading commissions and management expense ratios (MERs) on funds, may seem small but can add up over time. If you don’t pay attention to these costs, they can significantly reduce your long-term profits. Always review the fee structure for any investment or account, and look for low-cost options when possible to help maximize your returns.
Lack of diversification
Not diversifying your portfolio increases your risk, as your investments become more vulnerable to downturns in a single company or sector. If one area of your portfolio performs poorly, it can have a bigger impact on your overall results. By spreading your investments across different sectors and asset classes, you can help protect your portfolio and achieve more stable growth over time.
Now that you know how to invest in stocks, you might be wondering what account type to open.
Choosing the right account: How to buy and sell stocks online
Before you can start investing in stocks, you’ll need to open an investment account with an online brokerage like BMO InvestorLine. The type of account you choose will depend on your goals, time horizon, and tax considerations. Here’s a breakdown of the most popular account types available to Canadian investors:
Registered Retirement Savings Plan (RRSP)
An RRSP is a tax-advantaged account designed to help Canadians save for retirement. Contributions to an RRSP are tax-deductible, which can reduce your taxable income for the year. Investments inside an RRSP grow tax-deferred, meaning you won’t pay taxes on any gains, interest, or dividends until you withdraw the funds-typically in retirement, when you may be in a lower tax bracket. RRSPs can hold a wide range of investments, including stocks, bonds, ETFs, and mutual funds.
Tax-Free Savings Account (TFSA)
A TFSA is one of the most flexible and powerful investment accounts for Canadians. All investment growth and withdrawals are completely tax-free, making it ideal for both short- and long-term goals. You can use a TFSA to save for a home, a car, retirement, or any other purpose-there are no restrictions on how you use the money. Each year, you can contribute up to the annual limit set by the government (for 2024, it’s $6,500), and unused contribution room carries forward. TFSAs can hold stocks, ETFs, mutual funds, GICs, and more.
First Home Savings Account (FHSA)
The FHSA is a newer registered account that helps Canadians save for their first home. Contributions are tax-deductible, and withdrawals (including investment growth) are tax-free if used to buy a qualifying first home. This account combines features of both the RRSP and TFSA and is a great option for prospective homebuyers.
Non-Registered (Cash) Account
A non-registered or cash account doesn’t have contribution limits or withdrawal restrictions. You can use a cash account to buy and sell stocks, ETFs, bonds, and mutual funds on Canadian and U.S. markets. However, you’ll pay taxes on any interest, dividends, or capital gains earned. Non-registered accounts are ideal for those who have maximized their registered accounts or want total flexibility.
Margin Account
A margin account allows you to borrow funds from your brokerage to increase your buying power and potentially amplify your investment returns. While margin can be a powerful tool, it also increases your risk and is best suited for experienced investors who understand the risks of leverage. Margin accounts can be used for advanced strategies like short selling and options trading.
Registered Education Savings Plan (RESP)
If you’re saving for a child’s education, an RESP is a smart choice. It allows your investments to grow tax-deferred and offers access to government grants, which can significantly boost your savings. Withdrawals used for eligible education expenses are taxed in the student’s hands, often at a lower rate.
Next steps in how to invest in stocks
Investing in stocks is a proven way to build wealth, outpace inflation, and achieve your financial goals. By understanding the basics, setting clear objectives, conducting thorough research, and following a disciplined approach, you can confidently navigate the stock market-even as a beginner.
Ready to start investing? Start investing online with a BMO InvestorLine account.
Take advantage of BMO’s resources, tools, and calculators to plan your investment journey and make informed decisions. Review your portfolio regularly, stay focused on your long-term goals, and continue learning as you grow as an investor.
Ready to open a BMO InvestorLine Self-Directed account?
Complete your application and start investing online.
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