If statistics are anything to go by, chances are you’re a student who is so overwhelmed by the types of financial instruments out there that you don’t know where to start. Chances are you don’t have very much money to begin with.
According to a survey of generation Y investing habits done by American investment management company MFS last year, two in five millennials agreed that they would “never feel comfortable investing in the stock market.” Over half said that they were overwhelmed with choices, and just under half admitted that they were putting off investment decisions.
Taking the first step of investing is easier than you think, largely because limited money means limited investment options. Investing also doesn’t automatically mean wading into complicated portfolios and risk-heavy investments – every person makes that choice in the beginning about how tolerant of risk they are (some investments are safer than others) and how long they want to be in a certain investment (you’ll invest in something safer if you’re saving for a short-term goal versus something longer-term like retirement). To figure out what kind of investor you are, take a quiz here.
Tax-free savings account:
Before deciding what to invest in, first consider a tax-free savings account. Don’t be fooled by the name – a TFSA isn’t just a place to stash money. Implemented in 2009, you can place up to $5,500 per year into a TFSA.
That means that a TFSA is best used when you actually invest the money within it, rather than simply throwing cash into it like a savings account. While a TFSA generally has higher interest than normal savings accounts, the growth will still be minimal compared to the amount you’ll make by actually investing in something.
If it helps, don’t think of a TFSA as savings account. Think of it more as a tool to invest with.
If there were baby steps in investing, mutual funds would be it. While normal stocks invest in only one company, a mutual fund is diversified and invests in a variety of companies, currency and commodities under the watchful eye of a fund manager. Because the investments are diversified or spread across a number of vehicles like stocks in companies or corporate or government bonds, your money is safer and less susceptible to the ups and downs of individual companies in the stock market.
Essentially a mini-portfolio wrapped in an easy-to-buy package, the best part for students is that they can invest in a mutual fund with as little as $500 – a small amount when you think about the amount you would have to shell out to achieve the same portfolio on your own.
Having exploded in popularity in recent years, exchange-traded funds are the halfway point between mutual funds and stocks. In addition to being invested diversely, ETFs can be traded like a stock, which means you can play the market and attempt to buy low and sell high. Many of these funds also “track” an industry, where they invest in the top companies of whatever sector you’re thinking of, like mining or energy.
If you do buy a fund that tracks an industry, the upside is that you won’t have to pay the high commission fee that would have otherwise gone to the manager of a mutual fund. A few percent may not seem like much, but it adds ups when you’re dealing with larger amounts of money. You will however have to pay the brokerage fee, which is paid every time you buy or sell a stock.
Good news is, after you’ve gotten a handle on all three and know your way around, the next step up is stocks.