Diversification, investment quality, and a focus on dividends are key when you’re wondering, “how do I start investing in stocks?”

So you’re wondering, “how do I start investing in stocks?”

We continue to think investors will profit most—and with the least risk—by buying shares of well-established companies with strong business prospects and strong positions in healthy industries.

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Investors learning how to find the right stocks should look to tap the long-term growth that inevitably comes to well-established companies when they operate in relatively free economies. Here are the most essential elements for learning how to start investing in stocks:

1. Think like a portfolio manager to find top stock picks
2. Resist the temptation to copy prominent investors
3. Use technical analysis as just one tool
4. Look beyond a company’s share price
5. Focus on dividend-paying investments
6. Build a diversified portfolio
7. Practice patience with your investments

Portfolio managers gather information from companies, industry studies, and other sources. A good portfolio manager then tries to build clients portfolios that make money if things go well, but won’t lose too much if the opinions turn out to be faulty, as often happens.

1. How Do I Start Investing in Stocks? Think like a portfolio manager to find top stock picks

We do our own stock market research for our newsletters and investment services, and we apply it from a portfolio manager’s perspective. That’s why we advise sticking to mostly well-established companies; they tend to hold on to more value when things go wrong and recover faster

2. How Do I Start Investing in Stocks? Resist the temptation to copy prominent investors

Sometimes you’ll hear that a stock is a good buy because some prominent investor (a company, family or individual) has a stake in it. However, it’s important to remember that prominent investors don’t expect to profit in every investment they make. For example, sometimes they invest for strategic or political reasons, rather than profit.

3. How Do I Start Investing in Stocks? Use technical analysis as just one tool

Use technical analysis to support—not determine—your view of a company. Look at chart readings as one tool among many, but don’t look at the chart for a prediction of what’s going to happen. Look to see if the pattern on the chart seems to support your view of the stock, based on its finances and other fundamentals. However, remember that the stock market follows a multitude of factors to varying extents, and the most important or influential factors continually change.

4. How Do I Start Investing in Stocks? Look beyond a company’s share price

It’s a mistake to base your decision to buy or sell a stock on past stock-price performance alone. A stock never gets so high that it can’t keep rising, or so low that it can’t keep falling. That’s why you have to look beyond price changes and focus on investment quality when deciding whether to buy or sell.

5. How Do I Start Investing in Stocks? Focus on dividend-paying investments

One tip we share often is to invest in companies that have been paying a dividend for 5 or more years. Dividends are typically cash payouts that serve as a way for companies to share the wealth they’ve accumulated. These payouts are drawn from earnings and cash flow and are paid to the shareholders of the company. Typically, these dividends are paid quarterly, although they may be paid annually or even monthly. Canadian citizens who own shares in Canadian stocks that pay dividends will also benefit from a tax break they may be eligible to receive.

6. How Do I Start Investing in Stocks? Build a diversified portfolio

Always maintain a diversified stock portfolio—and avoid the temptation of trying to pick hot stocks or sectors.

Different investors may be more comfortable holding a larger or smaller number of investments in their portfolios, including stocks, mutual funds or exchange-traded funds (ETFs). Here are some tips on diversifying your stock portfolio:

When it comes to a diversified stock portfolio, stocks in the Resources, and Manufacturing & Industry sectors in general expose you to above-average share price volatility.
● Stocks in the Utilities and Canadian Finance sectors entail below-average volatility.
● Consumer stocks fall in the middle, between volatile Resources and Manufacturing companies, and the more stable Canadian Finance and Utilities companies.

Most investors should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.

7. How Do I Start Investing in Stocks? Practice patience with your investments

If you lack patience, you run a big risk of selling your best choices in the midst of a temporary downturn, prior to the next big move upward. If you lose patience and sell, you are particularly likely to do so at the low end of the trading range, when stock prices have weakened and confidence in the stock has waned.

What advice did you follow when starting your investing career?

What is one of the worst mistakes you made when you started investing in stocks?

This article was first published in 2019 and is regularly updated.