Money Smart: Investing 101

During her two years as a bank teller, Kathryn-Lynn Raskina met a lot of people who were drowning in debt and struggling to pay their bills. It wasn’t because they weren’t making enough money. It was because they didn’t know the first thing about debt or about managing their money. She doesn’t want you to be one of those people. She wants you to graduate money smart.

The first stock I ever bought was National Bank. I had $2,500 sitting in my tax-free savings account, and I decided I wanted to make it grow. So, I went to my bank and opened a trading account, which allows you to buy stocks on your own instead of through a stockbroker. This means less fees but no one-on-one advisor.

When you buy a stock on the stock exchange, you become part-owner of a company. Exciting, right? Two years ago, I sure thought so.

In July 2013, I bought 67 shares of National Bank, paying $37 per share. When you play the stock market you are betting that a stock is worth more than it is priced at. I thought National Bank was one of those stocks.

I watched with delight as my stock surged. By November, National Bank was valued at $46 per share. Not wanting to push my luck, I sold my shares. I was more than content with a gain of $600. But that content soon turned to agony, as I watched National Bank steadily increase to $54 per share over the next few months.

Historically, stocks have had higher returns than bonds, but with those high returns comes greater risk.

When you invest in bonds, you are essentially giving a loan to the government or company who issues it for a certain period of time. In return, for letting a company or government borrow your money, they pay you an interest payment, which is paid at a predetermined rate and schedule. You can buy bonds on the same trading accounts where you can purchase stocks.

Bonds behave differently than stocks. Generally, when stocks perform poorly, bonds do well. It’s for this reason that investors should have a mixture of bonds and stocks in their portfolio. This mixture is called diversification.

Justin Bender, a portfolio manager at PWL Capital Inc., does not recommend individual stock picking for first-time investors with little money. Instead, he says it’s better for students to invest in an index fund.

An index fund is a portfolio that matches the stocks in a market index, such as the S&P 500. A market index contains a grouping of stocks that is intended to represent the entire stock market, so that changes in the market can be tracked over time.

Index funds give you the diversification you want, no matter how much money you have to invest. Another bonus is that they don’t have very high fees, compared to similar investments, says Bender.

Generally speaking, Bender says you should have a index made up of 60 per cent stocks and 40 per cent bonds. However, “there is no hard and fast rule,” he says. Before buying an index fund, he says students should be looking at the company website and should read up on how it invests and what it invests in — which is a lot less work than picking the stocks yourself.

When I first started saving, my father gave me some advice that stuck with me. He said, “Money loses its value.” He was referring to how inflation eats away at our purchasing power — the reason why a chocolate bar costs a lot more now than it did when our parents were our age. This is why it is so important to invest.

And if we start investing early, we have something amazing on our side. Time. Time for our money to grow.

Featured image by Augustine Ng