Investing 101: What can students do with their money?
We asked a finance expert to answer our questions about investing as a student
By Matthew Johnson and Christina Flores-Chan
Visuals By Sagal Duale
Every time we turn on our TVs, scroll through TikTok or even walk past book displays at the store, it’s hard to avoid being bombarded with information about investing.
But as inflation rises and students have even less disposable income, investing can seem daunting—especially given its complex nature.
To break down the numbers, The Eyeopener spoke to Steven Riddiough, an associate professor of finance at the University of Toronto’s Rotman School of Management and Jason Heath, the financial director and financial planner at Objective Financial Partners Inc.
What is investing?
Investing, according to Investopedia, is the process of putting money into financial plans, projects or companies for a period of time with the expectation and motive of making a profit over time. Types of investments vary depending on the duration of the investment, the amount of money invested and the project or plan upon which the money is being invested.
When a company opens up a portion of their ownership to the public, people are able to put money into that company by investing in a stock (the capital of a business). Once they own a share of the company’s stock, they become a shareholder and if the company turns a profit, the stock goes up and that shareholder’s stock price increases.
While shareholders have the option to sell or hold onto their share of the stock as long as they choose, when they do opt to sell the share, their goal is to sell the stock at a higher price than they originally bought it for—thus earning a profit.
Students who are looking to invest for the first time have a variety of options to choose from to begin building their investment portfolios. They can opt for self-run investment management services that allow you to buy and sell shares accessibly, like Wealthsimple or bank-managed personal investment plans from banks like TD or RBC.
Investing can be done through accounts such as a Tax-Free Savings Account (TFSA), an account that individuals 18 years of age and older with a valid social insurance number can use to set aside money tax-free, according to the Canada Revenue Agency. Another potential option is a Registered Retirement Savings Plan (RRSP) .
An investment portfolio can be as heavily tailored to personal preference and circumstance as the investor desires, depending on the account chosen to invest through and whether the investor manages their own portfolio or leaves it up to the bank or a different service to handle.
How much should I invest?
Rather than focusing on the amount of money invested, “the important point is that students do invest,” Riddiough said in an email to The Eye.
He said investing is “a long-term business when done well” and a business best started up at a young age, no matter the number of dollars put in.
“Over time, money makes money through interest…and the earlier we start investing, the more we are likely to accumulate over time,” Riddiough said.
However, investments don’t always go up and earnings can take time. For students with less disposable income, selling stock shares too quickly or during a downturn in the market because they need the cash could result in a loss.
During an economic recession for example, the stock market would typically experience a downturn as companies struggle to make profits, leading stock prices to fall and decrease in value, according to Investopedia. The downturn would lead to a probable loss for any investor who chose to sell shares during that period of time.
“Students should never invest what they can’t afford. That means we first have enough to cover the essentials and have sufficient money on hand for emergencies,” Riddiough said. “Only then would I consider allocating money to longer-term investments.”
Keep liquidity, the ability to turn an investment into cash, in mind before putting sizable amounts of money away into more long-term or volatile investments, Heath said.
“A bank account is very liquid because it’s already cash, whereas a piece of real estate is not as liquid,” Heath said. “There’s varying degrees of liquidity and a business might be the least liquid because of how long it takes to sell one.”
What should I invest in?
Riddiough recommends speaking with financial advisors at local banks about specific investment needs, given the variety of each student’s individual circumstances.
“But at the outset of investing, I would aim for diversification and to have a long-term holding period,” Riddiough said.
Heath describes diversification as not having all your eggs in one basket, meaning that to diversify your investing portfolio is to invest in a variety of investments, as well as different types of companies and sectors. He adds that most people would consider a diverse portfolio as one that contains 10 to 20 different stocks.
One example Riddiough points out as a “good” diversification option is index funds, which are large groupings of stocks or bonds that track the performance of specific markets.
“Index funds allow you to buy an entire stock market in a single investment,” Heath explained, adding that there are index funds that represent specific sectors of a stock market, such as the financial sector of the (TSX).
For example, the Standard and Poor's 500 (or the S&P 500) is an index that tracks the performance of the 500 largest companies listed on stock exchanges in the United States.
“These typically have lower fees and provide exposure to a diversified portfolio of stocks or bonds, both domestically and internationally,” Riddiough said.
What is risk and how much should I take?
Risk is the constant possibility that investors may lose some or all of the money they’ve invested and earned, as long as the investment is being held and not sold. Different types of investments have varying degrees of risk, and the more risk investors take, the larger their potential return or potential loss.
Heath said that while stocks are known to be subject to ups-and-downs in the short run, they will usually increase in value over a longer period of time, such as over a few decades, as the value of money naturally increases—otherwise known as inflation.
“How much risk we can tolerate is a personal matter,” said Riddiough. “If we want higher returns in the future, we need to take more risk.”
Heath added that, on the other hand, investing too conservatively over the long run could lead to a loss as well. “If you invest conservatively in the long run, you run the risk of your investments not keeping up with inflation. There are risks from not taking enough risk.”
How can I learn more?
Riddiough recommends learning more about investing from the Canadian Foundation for Economic Education (CFEE) at finlit101.ca, a non-profit organization committed to improving economic, financial and enterprising capability.
“[The site] covers a lot of basic financial skills, including savings and investments,” said Riddiough. “Ultimately, it’s important to understand the different types of investments and the risks associated with each one.”
And while he believes that financial literacy should be taught in high schools across Canada, it’s never too late to learn.
“The more educated you are on investing, the more comfortable you will become in making your own decisions with what to do with your money and your portfolio,” Heath added.