7 Things to Know Before Investing in Stocks

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Written by Puja Tayal at The Motley Fool Canada

Many investors are skeptical when it comes to investing in stocks because they can be volatile. But if you know your stock well, you can make inflation-beating returns and generate wealth in the long-term. Here are seven things you should know about stocks before investing in them.

You can start investing in stocks with $100 

A stock price of $300 or $1,000 doesn’t mean it’s a good stock. It could be an oversold stock. Instead of stock price, you should look at the market cap and trading volume to determine if it’s a large-cap stock or not. Large cap stocks are known to be a more stable investment opportunity. Several good growth stocks and dividend stocks are trading below $50. You can start investing in these stocks for as little as $100.

Stocks that are a buy now can be a sell later 

There are some evergreen stocks like Enbridge (TSX:ENB)(NYSE:ENB) that are a buy at any time. Enbridge stock isn’t volatile and hovers between $42 and $55. It’s the stock investors buy for its high dividend yield. But most growth stocks are a buy when they fall, and a sell when they peak or when the future is not looking favourable for the business.

For instance, Air Canada stock is not a buy even though it’s trading near its 52-week low due to the fact that COVID changed the airline industry. While buy and hold is a good strategy, it’s important to sell stocks and book profits during bull markets. Even Warren Buffett sells stocks from time to time.

Income from dividends and stock investments is taxable 

Income from stock market investments is subject to taxes. You get a tax slip on your investment income. Income gained from collecting a dividend or selling a stock also counts. Consider tax liability before booking a profit or loss. Several registered savings accounts offer tax benefits for investments, like the Tax-Free Savings Account (TFSA). You can invest in stocks through this account and let your investment grow tax-free.

Tax benefits on registered savings accounts have a cap

All registered savings accounts have a cap on the investment amount that can avail tax benefits. Plus, each account offers different types of benefits. When deciding how to invest, consider these benefits to maximize your returns.

For instance, the TFSA has a limit of $6,000 in 2022 and keeps your investment income tax-free. But the amount you invest is taxable. TFSA is ideal for high-growth stocks that can convert $1,000 into $3,000 as your $2,000 capital gain will be tax free. Descartes Systems Group (TSX:DSG)(NASDAQ:DSGX) is a good TFSA stock that can grow your money severalfold. It’s a tech stock with a unique transportation focus that has an exceptional track record of elevated returns. Over the past 10 years, this TFSA stock has grown by a compound annual growth rate (CAGR) of 29.8%

Regular investing can help beat stock market volatility

As I mentioned earlier, a stock that is a buy now could be a sell later. This is because the stock market is volatile and driven by investor sentiment in the short-term. Panic causes markets to crash. But you can beat market volatility through regular investments.

A $500 monthly investment in the right stock can help you benefit from dollar-cost averaging (dividing up the total amount to be invested across periodic purchases of a target asset), to make the most of volatility. For instance, if you invested $100 on the last day of each month since January 2022 in Descartes stock, your average cost would be $84.8. Even though the stock has dipped 10% year-to-date, your portfolio would be 3.7% in the green as of this writing.

Investors are different from traders 

While I suggest regular investing, this doesn’t constitute active investment. Active investing is buying and selling stocks in a short time period to profit from speculation or news. That is what traders do. Investors, on the other hand, invest in the company’s future business prospects.

If you lost money during the BlackBerry short selling, you’re not alone. Many investors who were initially swayed lost money in the trading game. When putting your money in a stock, be clear on whether it’s investing or trading and be prepared for the inherent risks involved.

Past performance doesn’t guarantee future returns 

Many analysts study the historical performance of a stock but this doesn’t guarantee future returns. One of the most effective ways to prepare for the unknown is by diversifying your portfolio.

The post 7 Things to Know Before Investing in Stocks appeared first on The Motley Fool Canada.

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Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends DESCARTES SYS, Descartes Systems Group, and Enbridge.

2022