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How to Buy Stocks in Canada: A Beginner’s Guide

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 where to start? 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 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 those with special insight and knowledge can only 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.

Getting Started with 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 a minimum investment of $100. 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. You can check most of them 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.

Common Shares 

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 upon. 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 provides 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 

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 (MER’s) 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.

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, learn about how they are run and the potential they have 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 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 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 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 I use personally, and I hold both a Tax-Free Savings Account (TFSA) a non-registered account with them.

In short, I love Questrade for its 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 makes 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 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, you can 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 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.

Portfolio Managers

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 the economies of scale.

Like a full-service investment advisor, they also bring a wealth of expertise, which can benefit.

That said, if you lack the number 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 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

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.

Preferred Shares

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.

Dividend 

When a company makes a profit, it may choose to return a portion of the profit 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. 

Earnings Per Share

Earnings per share, or EPS, is an indicator of how profitable a company is. To calculate EPS, divide the companies 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 order 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. 

Market Order

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.

Stop Order

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.

Limit Order

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.

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.  

Margin Trading

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.

6 Steps to Investing In Stocks and ETFs 

We’ve covered a lot of information on how to get started with stock investing. To summarize, here is the XX step process you need to follow: 

  1. Open a discount brokerage account online. 
  2. Fund your account from savings or transfer from an existing investment account.
  3. Choose an investment account, i.e., RRSP, TFSA, non-registered. 
  4. Research what stocks to buy (seek professional advice)
  5. Automate your deposits (highly recommended). 
  6. 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 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 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.

Comments

  1. Free Money Minute

    If you don’t make enough to max out your 401k plan, do you still advice investing in stocks outside of your retirement accounts? My thought is that you wouldn’t want to do this. I am curious as to what others think.

  2. Anton Ivanov

    I noticed a lot of people also get confused with the many different trade options available – market, limit, stop, stop limit. Not to mention selling short. This is a great starting guide, though!

    • Lisa

      I agree with Anton! I got easily confused when signing up through InvestorLine and got overwhelmed with the terminology. I initially selected “Trade Options” which messed me up at first but was later rectify. This is a good starting guide but make sure you understand the terminology when signing up and placing trades.

  3. Chris Muller

    Straight to the point, simple advice. Well written, Tom. I totally agree with your approach to go with ETFs. I myself invest in index funds directly through Vanguard, which is similar. Too many people try to get rich quickly by buying stock in small individual companies. They miss out on the potential benefits gained with a portfolio of stable, blue-chip companies with a history of modest and reliable long-term growth. Strive to balance out your stock portfolio by investing in both smaller companies with growth potential and major (large-cap) companies that are already established. These companies oftentimes have a stock price that is stable, meaning minimal risk. The risk is even lower when you buy a bundle of stocks in an ETF. Again, great read, thanks for posting!

  4. Femi Adeyemo

    Nice article. One thing I would also suggest is before investing real funds, it is ideal to utilize a simulation tool to build a strategy in buying and selling stocks. You might be the type of person that wants to invest long term, or you might be interested in trading. If the latter, a simulation tool would be great to use. My tool of choice is Thinkorswim from TDameritrade. I am based in the U.S, and so I am not sure if that TDameritrade is available in Canada. But there should be an online brokerage company in Canada that provide simulation tools to assist you in your path to buying/selling stocks.

  5. Judy Mouland

    So…clicked through to Questrade and saw several different types of accounts I could open. Had no idea which account to try. I appreciate the advice but feel like I did in my first computer class where my prof started talking about the cursor and I didn’t know where the on/off button was. Any suggestions? I am beyond novice, and just want to try an EFT as you suggest. Thanks

    • Tom Drake

      Hi Judy, The margin account is basically the regular account, though you might want to choose TFSA or RRSP as well. Those three account types operate the same, other than the tax advantages.

  6. Sai Das

    What is the impact of Capital Gain for Margin, TFSA and RRSP account types?
    I will be really greatful if you can explain each from tax perspective.

  7. Jack Haman

    It escapes me why Interactive Brokers is continually overlooked. They are American, but they do have a Canadian branch in Montreal. Their commissions are the lowest around. However, the minimum deposit may be difficult for some people.

  8. Tasawar

    I am new and want to buy some shares in Canada. I will be thankful if someone can advise me about some reliable online brokerage services.

  9. Marlon Brown

    I tried opening a Questrade account but it said i needed a minimum of $1000 …is there a way around that…I thought I could have started with $100

  10. Rich

    If I try to buy penny stock what platform should I use to buy stocks so that the commission fees do not become too much of problem to make any profit.

  11. Akram Elsaidy

    Hello,
    Would you recommend I start with investing in QuestWealth or should I just buy ETFs through a TFSA

  12. Jonathan

    Buying stock with wealthsimple trade is actually free

  13. arnold

    @Jonathan Questrade gives them $70 for every referral, while Wealthsimple does not give them money if they promote it.
    I like Wealthsimple for Canadian stocks

    • Tom Drake

      We actually have an affiliate relationship with both companies and do recommend them both. When this post was written, Wealthsimple Trade was only available for non-registered accounts, there were no RRSP or TFSA options, which is why we didn’t recommend them at the time.

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