How to Buy Stocks: A Beginner’s Guide to Buying Stocks
Have you always wanted to invest in the Canadian stock market, but had no idea where to start? You’ve come to the right place. In this article, I’ll show you everything you need to know about the basics of stock market investing.
Not only will you learn how to get into stocks, but I’ll share some tips from an expert and let you know the type of account you need, so that you can get started today. Are you ready? Let’s dive in!
Unlocking The Mysteries Of Stock Market Investing
Too many people make investing in the stock market more complicated than it needs to be. It’s as though investing is a great mystery, one that can only be solved by those with special insight and knowledge.
Thankfully, buying stocks doesn’t have to be a complex process. In fact, just about anyone can learn how to buy stocks with a little time and effort.
The first step is to open a brokerage account. Yes, it’s true that you need a broker in order to buy stocks.
The good news is that in 2018, you don’t need to visit a stock broker in person, call someone on the phone, or become engaged in a complicated transaction.
You can buy and sell stocks from the comfort of your living room, through an online discount broker. You don’t need very much money, either.
In many cases, it’s possible to open a brokerage account and start investing with as little as $100. Look for a reputable account online, and then open your account. Once you do that, you will be able to start buying stocks.
Online brokerage accounts are fairly easy to find. In Canada, there are no fewer than 12 leading discount brokerages vying for your investment dollar.
I’ve included more information on Questrade further down, along with an exclusive new account offer for MapleMoney readers, but first let’s take a closer look at what stock market investing is all about.
How Do Stocks Work?
If you’re new to the world of stock market investing, you may be wondering what a stock is in the first place.
Stocks, also referred to as shares, represent ownership in a corporation. They give the owner of the stock, also known as the shareholder, a claim on company assets and earnings. They can also grant the shareholder other benefits, such as voting rights.
To use a basic example, if a company issued 1000 shares, and you purchased 100, you would hold a 10% ownership of that company.
Of course, large corporations such as Google, or Royal Bank, are worth billions of dollars, with outstanding shares numbered in the hundreds of millions, so 100 shares would be a drop in the bucket when it comes to your claim on ownership.
But 100 shares is significant inside an individual portfolio, and can provide an investor with an opportunity for strong growth over the long term.
Types Of Stock
Corporations issue two main types of stock: common and preferred. Each type can be divided into several different classes, but these are the main categories.
Common shares provide the owner with voting rights at shareholder meetings, while preferred shareholders have a preferred claim on earnings, such as dividends. Preferred shareholders also have priority if the corporation were to go bankrupt.
Common shares are, exactly as they sound, more common.
What Is An ETF?
Exchange Traded Funds (ETFs) have become incredibly popular in recent years, and just might be the best way to get started with stock investing.
ETFs are groups of stocks that track the performance of a particular stock market index. With ETFs, Instead of trying to pick individual stocks, you receive the benefit of several stocks.
The benefit to a novice investor is that you don’t have to try and learn how to buy stocks before you get started. A solid ETF, particularly one like XIU or XIC that tracks a wide market, can be a great way to get started.
ETFs vs. Index Mutual Funds
At first glance, an ETF might seem similar to a mutual fund, in particular an index mutual fund, but there are some key differences.
While ETFs and index mutual funds both offer an indexable basket of securities, ETFs are more flexible than an index mutual fund, in that they can be traded just like an individual stock.
They also lack the management fees (MER’s) of a mutual fund, although most brokers do charge a trading fee on ETFs. Depending on your strategy, ETFs can be advantageous to index mutual funds.
Because of their simplicity, ETFs may also be the best way to get started with stock investing. Once you are more comfortable, you can move forward and learn how to buy individual stocks.
How To Choose Stocks
Choosing individual stocks for your portfolio begins with research, and lots of it.
To start, get as much information as you can on the companies you are interested in, learning about how they are run, as well as the potential they have for future growth.
Also, consider whether or not the stocks you choose are a good value. There are many different ways to evaluate stocks, and you can learn them and then apply them.
The important thing is to get started. An ETF can help you get started with investing, and start earning compounding returns, while you learn the ins and outs of how to buy individual stocks.
Make It Automatic
No matter how you choose to invest, or where you put your money, one of the best things you can do is to make it automatic.
You want to make sure that you invest regularly, since that is a good way to make sure that you are earning better returns over time.
Decide how much money you can invest each month, and have the money automatically withdrawn from your bank account and used to invest in shares of an ETF or a particular stock.
This investing technique is known as dollar cost averaging, and it’s used by investors of all experience levels not only for convenience, but to enhance investment returns over the long term. Here’s how it works.
What Is Dollar Cost Averaging?
Dollar Cost Averaging (DCA) involves the purchase of investments in smaller amounts on a regular schedule, ie. monthly, bi-weekly, rather than in lump sums, less frequently.
Automating the purchase of investments removes the need for an investor to try timing the market, as over the long term the investments will be purchased at a lower average price. This is where the true value of dollar cost averaging lies.
With dollar cost averaging, you can start small. As you earn more money, and learn more about investing in stocks, you can increase your contributions, as well as start finding other stock investments that will help you reach your financial goals.
A Quick Look At Questrade
As I mentioned near the beginning of this article, Questrade is the online broker that I use personally, and I hold both a Tax-Free Savings Account (TFSA) and non-registered account with them.
In short, I love Questrade for their low overall fees and ETF accessibility. As you’ll learn a bit later, one of the most important aspects of investing is to keep your costs in check.
When buying stocks, high fees will diminish your returns over the long run. A single transaction may not seem that expensive, but over time, the fees will add up.
Low Fee Stock Trades
Questrade allows you to buy stocks for as little as $4.95 per trade. Currently, it’s the lowest price you’ll find anywhere, with some of the competition charging as high as $9.99 per trade.
No Commission ETFs
Questrade actually waives the trading fee on ETF purchases, an offer only one other competitor (Virtual Brokers) can match. This alone make ETFs an attractive alternative to more traditional products, such as mutual funds.
In addition to Questrades low cost advantage, MapleMoney readers can benefit by using my Questrade exclusive link, and earn $50 in free trades by signing up here. If you’re serious about buying stocks, it’s a great way to get started.
As I mentioned previously, there are several other low-cost brokerages in Canada, including offerings from all of Canada’s Big Banks. Scotia iTrade is a good example of a discount brokerage offering from a major bank.
Regardless of where you choose to open your account, as long as you have the necessary identification, and can provide your bank account information for transfers of money, it’s possible for you to get started trading stocks.
Alternatives to Using A Discount Brokerage
A discount brokerage is the easiest way to start buying stocks. But it is a truly do-it-yourself option. The account holder is fully responsible for all of the decision making, as well as doing the necessary research.
Of course, not everyone is interested in a self-directed approach, and for those folks, there are other options available.
Full Service Investment Advisor
You can buy stocks through a full-service advisor. One advantage to this approach is being able to receive expert advice on your investments.
As the investor, you will have the final say on any trades that are made, but you have someone you can consult with prior to placing trades.
Not only that, but an Investment Advisor will possess the technical knowledge to manage the account administration on your behalf.
The downside is that it is a more expensive way of doing things. Not only will you incur higher trading fees, but your advisor will expect compensation for the advice that they are providing.
You will need to decide if the relationship and advice capability is worth the trade off of higher fees, but know that the option is available.
Many banks and investment firms will employee teams of portfolio managers. These individuals cater to higher net worth clients, and often provide a broad range of additional services, such as tax & estate planning.
Portfolio managers often act as discretionary managers. This means that while the investment objectives are established together, the client gives full control of the day-to-day investment decisions to the portfolio manager.
While portfolio managers will still charge a fee for their services, by using the economies of scale, they can often reduce the cost for the investor.
Similar to a full service investment advisor, they also bring a wealth of expertise, which can be of benefit.
That said, if you lack the amount of investable assets to qualify, or you prefer to remain involved with the day to day decision making, a portfolio manager may not the best option for you.
Key Definitions To Know
When you first get into buying and selling stocks, you may find yourself overwhelmed by the terminology. It is a new world you’re venturing into, after all.
To help you out, I’ve provided you with a few key terms you’ll want to become familiar with:
Common shares represent partial ownership in a corporation. In addition to earning shares of company profits, holders of common stock are given voting rights at shareholder meetings, where they have a voice in matters of corporate leadership and policy.
Holders of preferred shares are the first to receive company earnings. For example, dividends are first paid out to preferred shareholders, and then to common shareholders. Preferred shareholders do not have voting rights, however.
Bid and Ask Price
The bid price of a stock or ETF is the highest price that a prospective buyer is willing to pay, while the ask price is the lowest acceptable price for a prospective seller. Depending on how many shares are being offered at the bid or ask price, some of your order may be filled at a price other than the bid or ask.
A market order is an order that is filled immediately at the current market price. The priority here is not the price itself, but the certainty that the shares will be purchased. It’s the most simple way to fill an order to buy or sell stock.
A stop order is an agreement to buy or sell a stock when it reaches a specific price. When it does, it becomes a market order, and is filled.
For example, if a stock in ABC company is currently trading at 5.00 per share, you may place a stop order to buy the stock when it reaches $4.75/share. This doesn’t mean that you will get the stock at $4.75/share, just that the market order will be triggered at $4.75.
A limit order differs from a stop order in that the investor sets the minimum or maximum price that they are willing to buy or sell shares. Unlike stop orders, limit orders do not become market orders.
This guarantees the investor that they will realize only their targeted price or better. Depending on the broker, there can be an additional cost to placing a limit order.
Buying on margin is the practice of using funds borrowed from the investment firm, to invest. This is considered leveraging, as the client is investing money they currently don’t have.
While margin trading can provide investors with the opportunity to multiply their returns, potential losses are also compounded, making margin trading a high risk activity. As such, margin trading is not suitable for the novice investor.
Stock market investing can be intimidating for beginners. My hope is that this article has provided you with everything you need to get started, and helped you decide which online brokerage account will best meet your needs.
In closing, I’d like to leave you with an additional resource. The following episode is from the MapleMoney Show, my weekly podcast. My guest is John Robertson, a personal finance blogger and author of the book, The Value Of Simple. John is a great resource for anyone who’s new to investing.
In addition to our interview, John has a course specifically for investors, which you can access here. Click play to hear John’s advice on investing for beginners.