How to Buy Stocks in Canada: A Beginner’s Guide
Have you always wanted to invest in the Canadian stock market but had no idea how to start trading stocks? You’ve come to the right place. In this article, I’ll show you everything you need to know about stock market investing basics.
Not only will you learn how to trade stocks, but I’ll share some tips from an expert and let you know the type of account you need to get started today. Are you ready? Let’s dive in!
Unlocking The Mysteries Of Stock Market Investing
Too many beginner investors make investing in the stock market more complicated than it needs to be. It’s as though investing is a great mystery that only those with special insight and knowledge can solve.
Thankfully, trading 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.
Start Investing in Stocks
If you’re interested in adding stocks or exchange-traded funds (ETFs) to your portfolio, the first step is to open a brokerage account or find a stockbroker.
The good news is that in 2021, you don’t need to visit a stockbroker in person, call someone on the phone, or become engaged in a complicated transaction.
Instead, you can trade stocks from the comfort of your living room through an online discount broker. This is also referred to as self-directed investing. Another bonus is that you don’t need a lot of money to get started.
Where to Find a Discount Brokerage Online
In many cases, it’s possible to open a brokerage account and start online trading with an initial deposit of $100 or less. All you need is to find a reputable self-directed account and get started. From there, you will be able to start buying stocks.
Online brokerages are fairly easy to find. In Canada, there are no fewer than 12 leading discount brokerages vying for your investment dollar. Most discount brokers offer preferred pricing to active traders who trade frequently. You can check out the leading brokers in our review of the best Canadian online brokers, but here at MapleMoney, our top choice is Questrade.
I’ve included more information on Questrade below, along with an exclusive new account offer for MapleMoney readers. But first, let’s take a closer look at what stock trading 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.
Also referred to as shares, stocks 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 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, or shares: common and preferred. Each type can be divided into several different classes, but these are the main categories.
Investors can purchase common shares on the stock market during open hours. Stock prices fluctuate up and down based on market forces, otherwise known as investor demand. Factors influencing that demand can include a company’s financial performance or industry outlook, either negative or positive.
Rights of Common Shareholders
One of the primary benefits a common shareholder has is the right to vote at special meetings, where board members are elected, and major policy decisions are decided. The ability to vote provides a common shareholder with a sense of control over the direction of a company, especially if you own a large number of shares.
Common shareholders also receive dividend payments, which provide another income source over and above capital gains. Of course, some companies are more prone to pay dividends than others, so if you’re particularly interested in dividend investing, you definitely want to do your research before purchasing stock.
Preferred shares are another type of company stock. While they are listed as an equity investment, they are considered more of an income type of investment due to some of the protections offered to preferred shareholders.
Preferred Shareholder Rights
Unlike with common shares, owners of preferred shares do not have voting rights. However, preferred shareholders receive priority when it comes to dividends and is paid out before common shareholders receive theirs. Preferred share dividends tend to be more lucrative than common share dividends.
Preferred shareholders also have a priority claim on assets if the company were to become insolvent. Preferred shares can be converted to common shares, while the opposite is not possible.
What Is An ETF?
Exchange-Traded Funds (ETFs) have become incredibly popular in recent years and might be the best way to start stock investing.
ETFs are groups of stocks that track the performance of a broad 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, particularly an index mutual fund, but there are some key differences.
While ETFs and index mutual funds offer an indexable basket of securities, ETFs are more flexible than an index mutual fund in that you can trade them just like an individual stock.
They also lack the management fees (MERs) of a mutual fund, although most brokers 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. ETFs can be an essential part of any diversified portfolio.
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 and learn about how they are run and their potential for future growth.
Also, consider whether or not the stocks you choose are of 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 learning the ins and outs of how to buy individual stocks.
Make It Automatic
No matter how you choose to invest or put your money, one of the best things you can do is make it automatic.
You want to make sure that you regularly invest since that is a good way to earn 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 purchasing investments in smaller amounts on a regular schedule, i.e., monthly, bi-weekly, rather than in lump sums, less frequently.
Automating the purchase of investments removes the need for you to try timing the market, as, over the long term, you will purchase the investments at a lower average price. This is where the true value of DCA 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 and 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 I use personally, and I hold both a Tax-Free Savings Account (TFSA) and a non-registered account with them.
In short, I love Questrade for its low 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.
High fees will diminish your returns over the long run when buying stocks. A single transaction may not seem that expensive, but the fees will add up over time.
Low Fee Stock Trades
Questrade allows you to buy stocks for as little as $4.95 per trade. With some of the competition charging as high as $9.99 per trade, it’s one of the lowest rates you can find. Wealthsimple Trade has even lower fees – commission-free trading when buying or selling stocks and ETFs. Learn more in our Wealthsimple Trade Review.
No Commission ETFs
Questrade offers free trades on ETF purchases, an offer only a couple of other online brokerages, including Virtual Brokers and Wealthsimple Trade, can match. This alone makes purchasing ETFs an attractive alternative to more traditional products, such as mutual funds.
In addition to Questrade’s 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 an online brokerage offering from a major bank, as is TD Direct Investing or RBC Direct Investing.
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 money transfers, you can start trading stocks.
Alternatives to Using A Discount Brokerage
A discount brokerage, also known as an online brokerage, is the easiest way to start buying stocks. But it is a truly do-it-yourself option as no one is waiting to provide investment advice. The account holder is fully responsible for all decision-making and 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 can receive expert advice on your investments.
As the investor, you will have the final say on any trades made, but you have someone you can consult with before 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 employ 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, they can often reduce the cost for the investor by using economies of scale.
Like full-service investment advisors, they also bring a wealth of expertise, which can benefit.
If you lack the number of investable assets to qualify or prefer to remain involved with the day-to-day decision-making, a portfolio manager may not be the best option for you.
Key Definitions To Know
When you first buy and sell stocks, you may find yourself overwhelmed by stock market 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. 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.
Capital gains occur when investors sell stocks at a profit after the market price has gone up in value. If you’re planning to invest in stocks, realizing capital gains will be at the top of your list of long-term investment goals.
When a company makes a profit, it may choose to return a portion of its earnings to shareholders in the form of a dividend payment. Dividend payments are most often made on a quarterly or annual basis. I should note that a dividend is not guaranteed, and not all companies pay dividends regularly. That said, dividends offer a reliable source of investment income if you own stock in the right companies.
When companies have a track record of consistently paying dividend income to investors, their shares are considered dividend stocks. Many self-directed investors are drawn to dividend investing and the steady income dividend stocks provide.
Dividend Payout Ratio
The dividend payout ratio refers to the percentage of a company’s earnings paid out to shareholders. The ratio is calculated by dividing dividends paid by net income, as follows:
Dividend payout ratio = Dividends paid/Net income
The stock price, or market price, is the current stock price that a single share is trading at on the stock market. The stock price is constantly fluctuating throughout the trading day.
A stock exchange is the physical location where stocks are bought and sold. In Canada, the largest stock exchange is the Toronto Stock Exchange or TSX. In the U.S., it’s the New York Stock Exchange or NYSE. There are more than 60 stock markets, or exchanges, in the world.
Growth stocks are associated with companies expected to increase their capital value at a high rate. Perhaps the best example of a Canadian growth stock is Shopify, the massive e-commerce platform.
Earnings Per Share
Earnings per share, or EPS, is an indicator of how profitable a company is. To calculate EPS, divide the company’s total profit by the number of common shares outstanding.
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 asking 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 orders may be filled at a price other than the bid or ask.
Bid and Ask Spread
The bid and ask spread represents the difference between the highest bid price and the lowest asking price.
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. Market orders are the easiest 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 limit 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.
Initial Public Offering (IPO)
An initial public offering is a process that occurs when a private company “goes public” and begins selling shares on the stock market.
An investment portfolio is a collection of investments owned by a single investor. A portfolio can include any combination of assets: stocks, corporate and government bonds, mutual funds, ETFs, real estate, REITs, money market, crypto assets, etc.
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 allow investors to multiply their returns, potential losses are also compounded, making margin trading a high-risk activity. As such, margin trading is not suitable for novice investors.
Direct Stock Purchase Plan (DSPP)
Direct stock purchase plans, or DSPPs, allow investors to purchase stock directly from the issuing company. The benefit is that it removes the requirement of a stockbroker, reducing investment costs. DSPPs are not as popular these days since online brokers have made stock investing both accessible and affordable.
Registered Investment Dealer
A registered investment dealer is a company licensed to sell a wide variety of investments to individual investors, including stocks, bonds, mutual funds, ETFs, and more. Dealers can also provide additional services in the investment process, such as investment advice.
Registered investment accounts are government-sponsored non-taxable accounts. The rules vary, but the main advantage for investors is having the opportunity for their money to grow in a tax-sheltered investment product. In Canada, registered investment accounts include RRSPs, TFSAs, RESPs, RIFs, and more.
Unlike a registered account, the income earned in a non-registered investment account is fully taxable. There are no limitations to the types of investments you can hold in registered and non-registered investment accounts. You can hold stocks, mutual funds, ETFs, participate in index investing, dividend investing, you name it.
6 Steps to Investing In Stocks and ETFs
We’ve covered a lot of information on getting started with stock investing. To summarize, here is the 6 step process you need to follow:
- Choose your trading platform and open a discount brokerage account online.
- Fund your account from savings or transfer from an existing investment account.
- Choose an investment account, i.e., RRSP, TFSA, non-registered.
- Research what stocks to buy (seek professional advice)
- Automate your deposits (highly recommended).
- Review your portfolio regularly (minimum quarterly)
How to Buy Stocks In Canada: Final Thoughts
Stock market investing can be intimidating for beginners. I hope that this article has provided you with everything you need to start investing and helped you decide which online brokerage account will best meet your needs.
Of course, before you invest in stocks, always consider your risk tolerance when deciding on an investment strategy. Even the bluest chip stock carries some risk, and positive returns are never guaranteed.