How Should a Beginner Invest in Stocks? Start With This Index Fund 

Cheers to a new beginning. Let us begin the new year by starting your stock market investing journey responsibly.

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This year, fight procrastination and start investing in stocks. The beauty of the stock market is you can continue staying idle after investing in a few buy-and-hold stocks. Spending time in the market by doing nothing can earn you more returns than staying active in the market.

Without further ado, let us pump up the intensity and get you started with your stock market journey.

How should a beginner invest in stocks?

Have you opened a trading account? Now, set aside an amount that you will put in your trading account every month. How much you want to invest depends on your financial commitments and goals, life stage, and much more. But for starters, 15% of your income is a good start for saving. If you earn $4,000 a month, you could consider saving $600, of which $400 could be invested in stocks and $200 in other instruments like bank deposits. If you think the $400 stock investment is an expense, it could help you stay regular with investing.

Note that this allocation is just an example, and it may vary from person to person, depending on your financial condition.

Once you have the funds arranged for investment, it is time to look for where to invest. No knowledge of stocks could leave you vulnerable to risks. Hence, the best way to begin is by following the market and going with the flow.

Index funds can give you the start you need through passive investing.

Start investing in stocks with this index fund 

BMO S&P/TSX 60 Index ETF (TSX:ZIU) is an index fund that replicates the TSX 60 Index. Let’s break down this jargon and understand how the investment will work. The TSX 60 Index is a list of the top 60 stocks with the highest market capitalization. The index is reviewed and rebalanced quarterly. If a stock is underperforming in the market, its market cap will fall. If another stock performs well and grows its market cap, it will replace the underperforming stock.

The index ETF invests your money in the same proportion that these top 60 stocks hold weightage in the TSX 60 Index. Royal Bank of Canada has the highest market cap, becoming the most valued stock on the TSX. Since the ZIU ETF replicates the Index, it has the highest weightage of 8.51% in the stock.

By investing in the ZIU ETF, you get exposure to the large-cap stocks that influence the overall market. The top 10 holdings have a good blend of high-growth shares like Shopify and Constellation Software and Dividend Aristocrats like Enbridge and Toronto-Dominion Bank, which grow their dividends annually. Some of these shares are those you can buy and forget for decades.

ZIU ETF also rebalances its holdings by selling the stocks whose growth has slowed and buying those whose growth has picked up. The ETF charges an annual management fee of 0.15% on the net asset value. As the fund manager follows market momentum and rebalances the portfolio, the ETF books profit at regular intervals by exiting underperforming stocks before it is too late.

How to make money from this index fund

The stock market is volatile and undergoes seasonal and cyclical up-and-down movements. The rule of making money in the stock market is to buy low and sell high. However, the unpredictable nature of stock price momentum makes it difficult to anticipate the next movement. A tried-and-tested method to make money from this unpredictability is to invest regularly in highs and lows.

This way, at the end of a few years, your average price will be lower than the high, reducing the risk of buying high. When you see your money generate extraordinary returns in a cyclical upturn, you can keep selling a small portion and enjoy your returns at regular intervals. 

Instead of timing the market and betting on the volatility, embrace volatility. This method allows you to buy in the downturn and sell in the upturn without losing your night’s sleep.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Constellation Software and Enbridge. The Motley Fool has a disclosure policy. Fool contributor Puja Tayal has no position in any of the stocks mentioned.

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