Thinking about investing on your own in the stock market without investment advice? Take some time to think it over: Going it alone is a tricky business.

The markets are volatile and unpredictable. Knowledge and expertise are required to:

  • perform the appropriate financial and economic analyses of the companies you’re considering investing in
  • properly understand the characteristics of the stocks you’re thinking about buying

You will be responsible for your decisions and the results, good or bad.

It is better to use an investment professional if you don’t have:

  • the required financial, tax and other expertise and knowledge
  • time to gather, analyze and track information about possible investments
  • a high risk tolerance and sufficient financial resources to withstand the loss of all or some of your money if there’s an unexpected turn in the market

Think you can spot undervalued securities? Think you can tell when it’s the right time to enter the market? Think you can “beat the indexes”? Few of even the most sophisticated investors possess these abilities.

Overestimating your knowledge and abilities can be very costly.

End of the warning

Investing versus dabbling

Investing, unlike dabbling, requires knowledge and expertise, and while investing has risks, dabbling carries even greater risks.

Before investing in the shares of a publicly traded company, you need to understand and assess the business, risk exposure, capital structure, financial performance, indebtedness and other facets of the company. Analyzing these and other aspects is absolutely essential to maximize your chances of making a profit on your investment and minimize the risk of losing money. This analysis takes time and a willingness to familiarize yourself with the company’s financial statements and the information they provide on its performance, financial position and cash flow situation. A knowledge and understanding of key financial ratios is also important.

After you analyze all the company’s fundamentals, the stock’s value may not reach the levels you had hoped for. A stock’s value can be influenced by many factors that are external to the company, including the general economic environment, political or financial crises, trade tensions between countries, natural disasters, and public health issues. Investing based on an informed analysis therefore still carries risks.

People who dabble or speculate in the stock market don’t usually perform fundamental analyses or, if they do, they take dangerous shortcuts.

They may rely, for instance, on the latest newspaper article about a company, on the words of an acquaintance who has heard that the share price “is going to take off,” on the fact that the company’s stock recently fell sharply in price, or on rumours on social media. Individual investors who rely on such “information” run the risk of seeing their “investment” quickly lose its value, which is artificially inflated as a result of speculation by other dabblers.

The AMF monitors the market to uncover and stop fraud schemes. Despite this, individual investors are more likely to fall for a pump and dump scheme, a scam often linked to penny stocks. A pump and dump scheme involves fraudsters accumulating a company’s stock and then artificially inflating its value by spreading fake positive news about the company through a variety of popular communication channels, such as the Internet and social media. The fake news makes the company seem more appealing than it really is. Dabblers then rush to buy the stock, driving up its market price. When the fraudsters feel the stock price has risen sufficiently, they sell their accumulated shares and make a big profit on the backs of their victims, who are left with worthless shares.

Before you invest on your own in the stock market on a discount brokerage platform, you should:

Carefully determine your investor profile

Resist the urge to jump into the stock market before determining your investor profile. The profile is based on such things as your objectives, financial situation, risk tolerance and investment knowledge.

Would you lose any sleep if your investments dropped in value? If the market declines sharply, it is often recommended that you don’t panic and that you hold on to your securities so you don’t take an actual loss.

You’ll need your money and have to sell your investments in the short, medium or long term? If you need to sell them in the short term (for example, within a few months), you should probably choose safe investments.

Be thorough when searching for and analyzing information

For example, if you want to buy the shares of a company, review relevant documents that will answer such questions as:

  • What indications are there that the investment will be profitable?
  • What could affect the company’s profitability? Is the company facing legal proceedings? Has a caution been issued regarding its viability as a going concern?
  • Does the company operate in an industry with good future prospects? What are the company’s competitive advantages and production capacity? Who’s on its management team and board of directors?
  • If it’s a manufacturer, is its equipment state-of-the-art or obsolete?
  • What is the company’s financial position? Publicly traded companies are required to produce quarterly and annual financial statements. The company’s financial statements and other material documents, including prospectusesA prospectus is a detailed information document that a company must prepare to be able to sell securities (such as shares) to the public.
    It must provide full, true and plain disclosure of all material facts likely to affect the value or market price of the security in question.  
    , annual reports, management's discussion and analyses (MD&As)Management’s Discussion and Analysis (MD&A) is a document that explains management’s point of view on the company’s financial statements, financial condition and future prospects. This report complements the financial statements, but does not form a part of them., annual information formsThe annual information form is an information document that describes the company and its activities at a given time, future outlooks, the risks to which the company is exposed and any other factors that impact the company. and news releases, can be found on the SEDAR+ This link will open in a new window.

To invest in the stock market, you generally need a long-term investment horizon

Will you need your money in the short term? If so, buying shares of a publicly traded company may not be a good idea.

Market volatility and the external factors mentioned earlier may cause the value of your investment to drop just when you need your money. You would then incur a loss when selling the shares.

If you have a short investment horizon, then it’s better to stick to safe investments that generate lower returns without the unnecessary stress.

Consider that you could lose all or part of the value of your investment

Never forget the harsh truth about investing in the stock market: Regardless of your knowledge, expertise, analyses and past successes, there are no sure bets. The company you invested in could experience major financial difficulties that could quickly lead to insolvency or bankruptcy, in which case you could lose all  the money you invested.