8 Practical Ways To Invest In The Stock Market

Disclaimer: I am not a financial or tax advisor. You are trading at your own risk and should consult a financial advisor for any investment decisions. Do your own due diligence when considering investing, and this information is for education/informational purposes only. The article “8 Practical Ways To Invest In The Stock Market” and “how to invest into the stock market” serves as educational content, not investing advice.

Cover Image by Sergei Tokmakov Terms.Law from Pixabay

So, you’re looking to start investing in the stock market. I assume, as of now, you’ve done some research, looking into what online brokerage account you can put money into and what influencer you should purchase a day trading class from (sarcasm). Afterall, the online brokers are not enough to invest money to earn 1000% returns daily.

Well, now you’re at the point of trying to figure out what you want to invest in. What is there to invest in? What’s worthwhile?

This article aims to discuss some of the other securities that anyone can purchase on the stock market and discuss how they make their holders money.

Understand that each of these securities or debt is discussed in brief detail. Of course, there is more to learn about each, and I certainly recommend you to do some research. I won’t teach you how to make money off of the stock market and what to purchase. You’ll need to determine that yourself.

Instead, I’ll provide you with some information about each so you can decide what to research further.

Individual Stocks:

If you haven’t heard about what a stock or stock investing was, I would be genuinely shocked. It’s not hard to hear about stocks or the stock market itself. On places like YouTube, Instagram, or the news discussing them in some nature, I’m sure everyone, or at least most people, has had exposure to them.

So to reintroduce you to stocks, they are equity ownership of a public company. What this exactly means is, every stock represents a piece of ownership of the particular company.

Let’s say that a company like XYZ Inc. has 1,000 shares issued. This means that there are a total of 1,000 shares of the company. Now let’s say Serge owns 100 shares of this company. Well, he would own around 10% of the company. We take his ownership (100) and divide it by the total shares issued (1,000), which gives us 10%.

Now 1,000 shares are unrealistic figures for a public company. A public company may have millions or hundreds of millions of shares issued. And no, it’s not typical that one individual owns all the shares of a public company because that beats the purpose.

The purpose of stock for companies is to issue these shares as a fund to raise money for themselves. With each share comes a price, which the company can reel in to help with their operations or pay off debt.

Stocks are likely the most popular form of security to purchase on the stock market as there are thousands you can choose from.

How To Earn Money From Individual Stocks:

There are two different ways you can earn money from stocks. The first and the commonly known way is through stock appreciation. This is when stocks increase in their value from a particular price. I don’t think I need to clarify much on how this works. Ideally, you buy low and sell high.

Yet, this doesn’t always happen. While stocks can increase in price, they certainly can decrease and end up going to $0. It has happened and will happen in the future.

Ideally, people will follow a particular investing strategy to increase their investments significantly over time. Whether that be value or growth investing, there certainly are options for you to look up and do more research on.

Another way stocks grant you money is through dividends. Now, if you’re not familiar with what dividends are, they are essentially cash paid out to you for holding the stock. Yes, companies will pay you to hold their stock!

But here’s the catch, they may not pay you much money. Let’s look at Enbridge (ticker: ENB). As we can see by their statistics, they are likely to pay a dividend of $3.34. This means, for every share of Enbridge that someone owns, they will earn $3.34.

Now, of course, for other stocks, the amount may be higher, or it may be lower. That all depends on the company and how much they want to payout.

Nonetheless, investors have focused on dividend investing as a form of investing style, in which they earn enough monthly to pay off their living expenses.

So to recap, there are two ways people earn money through stocks:

  1. Stock appreciation (stocks increase in value)
  2. Dividends

Mutual Funds:

Mutual funds are a fascinating form of investment. A portfolio fund manager controls mutual funds. But what is this type of security?

A mutual fund is a collection of stocks, bonds, or other types of securities or debt. So instead of investing in each stock directly, you can own a portion of the stocks. The same goes with bonds or ETFs.

But it’s all managed by an individual or a company. They go in and can make adjustments to the fund. Maybe it’s adding some new stocks. Perhaps it’s selling some.

Often the mutual funds will include a collection of holdings that are all from the same industry. This could be the financial industry, energy industry, or consumable industry.

But here’s a significant distinction of mutual funds. You must pay a certain fee to hold them. With stocks, there certainly is no fee withholding them. There may be a fee for trading, known as a commission fee, but even with mutual funds, that’s a possibility.

The fee associated with mutual funds you will hear is called the MER or management expense ratio. You will usually see them as a %. If we look at another example here, the BMO Canadian Large Cap Equity Fund has an MER of 2.34%. This amount is automatically taken off at a certain period of the year.

The turnoff from these types of investments is certainly the MER. Personally, I wouldn’t pay 2.34% for an MER. I probably wouldn’t pay 1%, but then again, that’s me personally.

But the brightest thing about mutual funds is that they are managed by someone else. You don’t have to search for specific stocks or bonds to include your portfolio. People can invest in a mutual fund and let someone else worry about that.

How To Earn Money From Mutual Funds:

Earning money from mutual funds is very similar to making money through stocks. You hope that the mutual fund(s) will appreciate in value and certainly appreciate highly over time.

As well, some do pay a distribution to their holders. If we look at the BMO Canadian Large Cap Equity Fund, it last paid a distribution of $0.0280 per fund. This amount isn’t large, but given that it’s a large-cap equity fund, people are likely holding it to earn an adequate return every year or when it comes time to sell.

Another bright side of investing in mutual funds is selecting the type of mutual fund you want. As you saw above, BMO uses this fund to target large-cap companies.

Maybe instead, you prefer one that focuses on large distributions. You can view and search for mutual funds that fit your investment style and risk tolerance. There are conservative-focused and hazardous-focused ones.

Bonds:

Image by Steve Buissinne from Pixabay

Precisely what are bonds? Well, bonds are a type of debt that is issued either by companies or by the government. Its purpose is a lot similar to those of stocks, to raise money for either institution.

As we will see below, there are different types of bonds, and as a result, they have differing returns.

Yet, while you can hold these bonds, you are rewarded with some interest and the principal payment you are owed for your initial investment. See, with bonds, you purchase them at different discounts or premiums. As a result, it will affect the amount of interest you are bound to receive, as well as the principal amount. These payments are made on a fixed basis, whether it be weekly, monthly, or yearly.

Hence why it is essential to look at the maturity dates of bonds, this tells us whenever the last payment is and when the current value of a bond reaches its fair/maturity value.

The recent question over the last maybe 20 years or more has been, “Do investors continue to invest a portion of their portfolio in this debt?”

Many people say no now because of the low returns they provide. For me, I’m unsure whether I will or not because of these comments. 

From the Intelligent Investor, Benjamin Graham has a solid position on bonds and that investors should dedicate a section of their portfolio to these investments.

Bonds are a great source of fixed income that can guarantee a positive return on a portion of your portfolio. But some of the returns may not be exceptionally high. It all depends on factors of the bond, which include:

– The maturity

– interest rate

– face value

– among other factors

I want to do more research in bonds, so be on the lookout for an article dedicated to just that.

How Bonds Make You Money:

With bonds, you make money by the principal and interest payments. Typically, a chart will discuss the interest you can earn for every $1,000, for example. It’s also likely they show you the total distribution you can make through investing in the bond. Here you can look at the Bank of Canada’s website for information on just that.

But, let me show you some examples I previously did on my beginner’s guide to investing in the stock market months ago:

Calculation 1: Discount Value Of Bond

When buying a bond, an investor will purchase a bond at its market value (what it’s listed as), and bonds typically have a face value of $1,000. For Serge, he purchases a bond in example 1 for $800 (market value). We call this a discount or discount bond since the $800 (market value) is lower than the $1,000 (face value).

On bonds, investors can earn interest, as we see Serge making over the four years. Serge will also be paid the $200 ($1,000 face value – $800 market value) over the four years.

The maturity of the bond in the example is four years. Therefore, we can say it matures in 4 years.

Calculation 2: Par Value Of Bond

In example 2, Serge purchases a bond for its face value, and we can say that Serge purchased it at par value. Therefore, Serge will not receive any payback at the bond but will receive a higher interest rate, which typically happens in buying a bond at par value, but not always.

Calculation 3: Premium Value Of Bond

Lastly, in example 3, Serge purchases a bond much above the face value at a market value. We call this a premium or premium bond. Like in example 2, Serge will not receive any pack back of the bond but will receive a higher interest.

Just note that these are not necessarily an accurate representation of how much a bond yields. It does vary over time, but don’t expect to earn hundreds of dollars every time you invest $1,000 into a bond.

ETFs:

Now I have to admit I like ETFs quite a bit. They are one of my favourite investments that I’ve researched so far.

An ETF is known as an exchange-traded fund. You’ve likely heard about them from popular finance influencers and YouTubers. They certainly are all the rage today for some good reasons.

First, they are an excellent way to cheaply diversity your portfolio. An ETF is very similar to mutual funds. Each fund holds a collection of stocks or bonds, depending on what it specializes in.

Let’s look at the iShares S&P/TSX Composite High Dividend Index ETF or what I like to call XEI.TO (this is the ticker).

Now, this fund aims to replicate the performance of the S&P/TSX Composite High Dividend Index. You will find that a lot of ETFs track index funds, which we will discuss below.

But as you can see under the “Holdings” section, if you click on the link, there are a variety of stocks this fund holds. Across multiple sectors, so if one industry, the financial services sector, gets poorly hit, the other sectors could potentially negate the losses reflected from the financial services sector.

ETFs allow you to minimize your potential losses if you purchased the individual stock on its own. Take this fund, for example. If you bought Enbridge stocks and tomorrow they went to zero, you will lose all of your money.

If you purchased this ETF and Enbridge went to zero, you’d likely have a negative return, but it’s also likely the ETF wouldn’t go entirely to zero. This is because Enbridge isn’t the majority holding in your portfolio, nor is it in these ETF’s.

Another excellent feature of the ETF is that it has a cheaper MER than mutual funds. Yes, it does cost you some money to hold ETFs. You can’t get away with passive investing without any fees associated. Yet, they are typically smaller than those on mutual funds.

Suppose I refer back to XEI.TO, this fund only has an MER of 0.22%. Much cheaper than the 2.34% as listed above.

I’ve done a complete breakdown of ETFs in this post here. You should check it out for more information on these types of investments:

How ETFs Make You Money:

Just like most other investments, ETFs will grant people a return once their prices rise. I think we’ve pretty much established how that is supposed to work.

Additionally, ETFs pay you out distributions. It’s the same as a dividend because it is a dividend. These large issuing companies that provide these types of funds collect all of the dividends, interest, and other distributions from all of the holdings the fund is invested into.

Then, the company distributes the earnings to the holders of the fund. The more you hold of a fund, the better the payments will be.

Another idea of how ETFs is that it helps prevent those losing money by being diversified. Diversification among a portfolio never hurts because there may always be a company scandal that is just looming around the corner, ready to become public and affect the stock’s price.

Or, of course, with bear markets, prices will decrease, in which ETFs are hopefully able to help an investor cope with the losses and red that are being endured. Yet, they don’t always grant security as if the entire stock market goes down, there’s a good chance that ETFs will too.

Partial Stocks/Fractional Shares:

Here’s an interesting fact that you may not have known. Did you know that you can purchase a partial amount of stock? That’s right! Instead of paying $2,000 for Amazon, you can pay $200.

But here’s the catch, you don’t own the whole stock. You probably assumed that, though. Which, of course, makes total sense. You can just purchase a single stock like that at an enormous discount. The stock would completely start to crash, knowing that the market would likely crash a little.

Partial stocks are ideally an attractive option to those who don’t have hundreds or thousands of dollars to purchase stocks in some of their favourite companies. Throughout the market’s history, we have seen a companies’ stock price reaches a high level to the point where they may issue out a stock split. This increases the total number of shares issued while also decreasing the prices per share.

Now while partial stocks are cheap by definition, they may not overly be cheap. A % of a stock can be dropped down to a couple of hundred dollars, which not all investors can access.

Yet, they still serve the same function as regular stock. It’s just now that you own a percentage of an individual stock.

The key is to find a broker that allows you to purchase these partial stocks/fractional shares. I don’t believe Wealthsimple offers fractional shares, but Interactive Brokers might.

How Partial Stocks/Fractional Shares Make You Money:

All right, do I need to go over this again? If the partial stock/fractional share increases in price, you will earn a return on your investment. If it goes down in price compared to your initial investment, then well, you know what happens.

These types of shares will also pay you proportionate dividends. Let’s say you own 20% of DEF Inc. For every share, they pay $5 in dividends. Well, since you own 20% of a share, you can earn $1 ($5 x 20%).

It’s a nice little reward from holding these types of securities.

Index Funds:

Index funds are becoming more noticeable now more than before. Especially with how many people talk about indexes like the S&P 500 and their track record of returns throughout the past while.

These types of investments are an index that tracks a particular benchmark. The benchmark itself varies depending on the objective of the index. The S&P 500, as I just mentioned, is an index that follows the 500 largest U.S. publicly traded companies.

What’s the benefit of investing in an index fund? Well, it’s the same as investing in an ETF or a mutual fund. An index fund helps you minimize your risks and diversifies your holdings. Instead of investing in one company, you can invest in hundreds or thousands of companies at a fraction of what it would cost you.

I mean, just imagine how much it would cost you to purchase one share of the largest 2,000 companies on the Toronto Stock Exchange (TSX)? Man, it would be so much money.

Index funds can be purchased through ETFs or mutual funds. Or you can buy index fund shares. For example, you can buy the Vanguard 500 Index Fund Admiral Shares.

I should mention that if you plan to go this route and purchase an index fund, you may be required to have a minimum investment of a particular amount. For the fund mentioned above, the minimum amount is $3,000. This amount makes purchasing index funds much less attractive and feasible for many people.

As a result, mutual funds or ETFs are a much cheaper option.

For purchasing index funds, there also is an MER that you will need to pay to hold this fund. This probably comes as no surprise given the similar investments.

How Index Funds Make You Money:

Let me keep it short and simple because this is a common theme throughout this article. Index funds will make someone money through their increase in value. As well, they pay you a distribution from the dividends or interest that the holdings generate.

REITs:

Image by Ricarda Mölck from Pixabay

REITs are known as real estate investment trusts. I’ve been briefly familiar with this type of investment but do not know an enormous amount about them. But they are companies that own or finance income-bearing real estate, whether they be homes, buildings, offices, or more.

As we know about real estate, it can provide a tremendous amount of monthly cash flow to those who directly own the real estate. But REITs, in a sense, take it a step further because it’s a very cheap way to have an investment in real estate. You may not directly own each resident or building, but you will earn income from the REITs.

You can purchase REITs through a direct fund, a mutual fund, or an ETF.

I’ve become familiar with REITs as a consistent way to earn a fixed amount of income to your portfolio every month. They seem to be inflation-protected security as there isn’t too much fluctuation in the income it provides whenever inflation is high.

REITs have had an excellent overall return over the past 40 years, as it’s had a roughly 11.51% annual return over that span. I’m sure some eyes bulge on those characteristics alone.

But really, it seems you are investing in the income this thing generates. As for how much it could generate for an investor, if we look at the Dream Industrial Real Estate Investment Trust, it pays a $0.70 dividend for every fund.

How REITs Make You Money:

REITs make you money by either increasing in value or by paying you a dividend. This is probably getting old by now, isn’t it?

Stock Market GICs:

GICs are guaranteed investment certificates. Usually, you’ll find GICs are offered by certain institutions, but mainly banks. The premise of this type of investment is that you invest a certain amount, usually around $1,000. Depending on the length/maturity, it’ll pay you a different return.

Typically, the longer you hold your investment, the better your interest rate will be over time.

So when I was doing some research, I had pondered over the question as to whether they were a GIC that followed a stock market index. Upon that search, I found one that I will briefly discuss.

There is a 3-year Canada Stock Market GIC. So the length of the term is three years, in which it tracks the S&P/TSX 60 index. As a result, this will yield you a minimum yearly return of 1.50%, it seems. Now the keyword there is minimum. It certainly could be higher than that percentage.

Speaking of minimum, you will need to invest at least $500 into this GIC.

I believe the maximum amount you can earn is 6.00%.

While earning 6% returns on this type of investment would be spectacular, there are two things to note here.

  1. You need to have that minimum amount to invest in the GIC
  2. There’s a cap on the amount you can fully earn. So you are potentially restricted from investing in other securities or debt that could grant you a much larger return.

But a guaranteed investment of 6% every year is pretty damn good if you ask me.

How Stock Market GICs Make You Money:

This one is a bit different. There is no dividend associated with the GIC. Instead, there is just the annual return that you can earn due to investing in the GIC.

GICs do not default as far as I’m aware, and if they did, well, that would be very problematic. Especially for an investment that might only grant you 1.5% returns annually. But it seems to be a safe option for very conservative and has a moderate to low risk tolerance.

Concluding Remarks:

There are plenty of options to choose from when it comes to finding an investment related to the stock market. Any option that can increase an individual retirement account by a positive amount would be a good one supposedly. Then again whether that account is earning as much as it could would be in question of the one who holds the account.

Just to recap, there are two primary ways you will make money through the stock market:

  1. Appreciation of the investment (increase in its value
  2. Through dividend or interest payments.

Depending on your preferences, you can even focus your investment strategies on a dividend-centered or value investment style. Maybe you’ll focus on stocks from the New York Stock Exchange rather than the Toronto Stock Exchange. It’s all up to you.

Even robo-advisors don’t seem to be a terrible option. Although, I’ll look into that myself and do a review.

I encourage you to pick an investment you might prefer and do more research on that particular option. This article does not serve as an in-depth guide on each investment.

However, if you are interested in reading a guide on an investment, please let me know using the comment section below.

Also let me know, what’s your favourite type of investment? Leave the answer down below as well.

Thanks for reading this article today, and I hope your portfolio increases 10000000% by tomorrow.

Disclaimer: I am not a financial or tax advisor. You are trading at your own risk and should consult a financial advisor for any investment decisions. Do your own due diligence when considering investing, and this information is for education/informational purposes only. The article “8 Practical Ways To Invest In The Stock Market” and “how to invest into the stock market” serves as educational content, not investing advice.

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