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- Investment legend Warren Buffett bought his first stock at the age of 11.
- Registered Education Savings Plans (RESPs) is one of the easiest ways to start investing.
- As a teenager, the RESP route, be it individual or jointly with parents is the best way to start with.
When faced with the question- what is his biggest regret in life, investment legend Warren Buffett answered, "I started to invest at the age of 11 and my biggest regret is, why didn't I start it five years earlier!"
Well, that makes it six, isn't it?
So you see, as a teenager you have ample opportunities to start investing in the stock market and get an idea about how the entire financial market ecosystem works.
Let's take a deep dive and explore how you can start investing in the financial markets in Canada as a teenager.
Step –1: Open an investment account (RRSP, RESP)
The first question to tackle is how to open an investment account. The gateway to investing in financial instruments such as stock, ETF's, bonds, mutual funds, etc. is via opening an account that will allow you to trade in those instruments.
Be mindful of the fact that trading decisions such as buy, sell and hold are entirely yours.
Parents of teenage children can open a Registered Education Savings Plans (RESP) account. The holder of such an account can either be the teenager or can hold it jointly with parents.
Step 2- Would you like your parents to buy them for you?
This is again a very natural sequence. Would like to operate solo and learn everything by yourself or take initial help from parents and get them to buy your desired financial instrument through their account or an online trading platform?
In situations where even your parents lack experience in trading in financial instruments, you can start with beginner-friendly platforms like Wealthsimple, Questrade, etc.
Even if you go through traditional brokerage companies, opening an account is free.
Step-3: How much money is needed to invest in the Canadian stock market?
This is a very cheerful phase as you can start investing in stocks, mutual funds, or ETFs with an amount as low as C$250.
As a beginner, many teenagers flock to robo advisors, which are automated investment management platforms providing services almost free of cost.
On the other side, if you are willing to handle your investment on your own, then go for any platforms such as Wealthsimple or Questrade etc.
The good thing is, there is no account minimum that you have to maintain. You can start trading with just one dollar!
Canadian trading platforms mostly do not charge any fees for holding an account. However, a nominal fees of around two per cent of the overall trading exercise in a month (where currency exchange is involved) may be charged.
Step-3: Set Up Automatic Deposits
This is an easy step.
Funding your trading or online brokerage account can be done by linking your regular savings account with the trading account.
Standing instructions can be given to the bankers to transfer a particular amount of money from the savings account to the trading account.
Step-4: What should be your investment approach?
As a teenager, the very purpose of this whole exercise is to learn from the mistakes that are likely to occur in the course of trading or investment.
But don't worry about it at all as you have nothing to lose.
Here are some of the important investment approaches that can be adopted:
If you idolize Warren Buffett, then your principal approach to investment should be value investing.
In this approach, you have to dig deeper into analyzing the true worth of a company. Be mindful that stocks trade below the intrinsic value.
The point of contact in your brokerage firm can guide you to have a better understanding of company fundamentals such as balance sheet analysis, quarterly and annual earnings, and predictions made by the top management of the company.
This one is the easiest approach. Instead of buying one or two stocks, you can choose to invest in an entire index via a portfolio of diversified stocks from every sector or Exchange Traded Funds (ETFs).
As an amateur investor, it is not a very bad idea to have few stocks that pay a dividend than can later come in handy to finance your higher education or your dream Harley Davidson motorcycle.
Dividend stocks that increase their payouts annually outperform the market over the long term.
You are young and hence have a higher risk appetite than others. So, growth investment approach is something that you should prioritize.
Growth stocks don’t pay dividends until they have reached a certain stage. Their priority is to grow rapidly at a pace that is higher than the market rate of return.
Step 5- Apprise yourself of market terminologies
It is not possible for you as a teenage investor to memorize market terminology and jargon all at one go.
This comes as you spend weeks and months in trading and watching the market movements you get to learn the terminologies and the various jargon such as fixed income, asset mix, asset allocation ETF, and many more.
But what kind of stock should you as a teenager be investing in? typically companies issue two types of stocks:
These are the shares the prices of which are set by the market and by owning them you become a part of the company's management.
Earning money through this type of investment is either through appreciation in value or dividend payments.
As the owner of common stock, you get to vote at the shareholders' meeting.
Preferred stock gives you the flavor of both common stock and bonds. Investing in preferred stock you get the dual benefit of earning money through the appreciated value of the stock and a consistent income typically provided by bond.
It has a par value, for example, US$100, and the dividend is usually a percentage of this value.
You don't get voting rights, but the company prioritizes you on claims to a company's assets and income in case there is dissolution.
Canadian financial market has tremendous potential for future growth and starting at an early age will keep you ahead of your peers. The entire market is waiting for you to explore as it will provide you the best opportunity to learn from mistakes at practically no cost.