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Wondering how to buy stocks in Canada, but have no idea where to start? You’re not alone: 4 in 5 millennials are saving money every month, but only half of us are investing in stocks. Luckily, with online brokerages and robo advisors, investing in stocks is easier than you think. Here’s an introduction on how to buy stocks in Canada.
How to Invest in Stocks
For buying stocks, you must do three things:
- Open a brokerage account with an online brokerage like Questrade (our #1 choice).
- Figure out what you want to buy: are you interested in buying stocks, bonds, mutual funds, ETFs, socially responsible investments? The key is to put together a diversified, balanced portfolio.
- Have money ready to invest: You don’t need big bucks to get going. You can invest as little as $100.
Let’s look at the options for how to invest in stocks in Canada.
How Do Stocks Work?
After buying a stock (or a “share”), you receive ownership over a small portion of the company. As an owner, you’re entitled to a cut of the company’s profits. The more shares you buy, the higher your stake in the company. For example, if a company comprises 1000 shares, and you purchased 100 shares, you would own 10% of the company.
Being a shareholder can come with certain privileges, including the right to receive dividend payments and the right to vote at shareholder meetings.
Types of Stock
Corporations typically issue two types of stock:
- Common stock: Shares are usually purchased at a price set by the market, and represent ownership in a company. You can make money from investing in this type of stock either through stock appreciation or dividend payments. However, not all stocks offer dividend payments. Owners of this type of stock get to vote at shareholder meetings.
- Preferred stock: It blends the elements of bonds and common stocks and bonds: the ownership and potential appreciation features of common stock combined with the consistent income a bond provides. Preferred stock has a stated par value, such as $100, and the dividend payment is a percentage of this. Preferred stock comes with more risk than investing in company bonds or common shares. Shareholders also get no voting rights, but you do get top priority on claims to a company’s assets and income.
What Is An ETF?
Exchange-traded funds (or ETFs) are a bundle of stocks packaged together to copy the performance of a stock market index. Basically, it’s an investment fund that lets you buy a large basket of individual stocks or bonds in one purchase.
ETF vs. Index Mutual Funds
A mutual fund is the relative of the ETF, but with a much higher price tag. It’s “actively” managed by a fund manager, who selects specific stocks to try to “beat the market.” Mutual funds have higher management fees than ETFs, and evidence shows they don't beat the market.
In comparison, an ETF looks to copy the performance of a stock market index, which is part of a “passive investing” strategy.
How to Choose Stocks
Choosing individual stocks takes research. There are different ways to evaluate how any stock is valued. If you’re serious about picking individual stocks, study up and crunch the numbers.
No matter how good you think you are, stock picking is hard. Even with the best research and sophisticated analysis, professional investment managers struggle to get things right.
There is just no way to know for sure if the future price of a stock will go up or down. For picking individual stocks, it is very possible to win sometimes – just be prepared to lose too. That risk is only part of the process.
We highly recommend when you first start investing, to start broad. This means that you shouldn't pick individual stocks out of the gates. Instead, get comfortable with investing and pick a few ETFs, index funds, or mutual funds. This is a great way to help you understand how the market works, keep costs down, and instantly diversify your portfolio.
Once you're more comfortable with investing (or if you're already a step ahead), then an excellent place to start is by looking into value investing. Value Investing is a methodology initially created by Benjamin Graham but is the foundation of investment strategies for folks like Warren Buffet today. This requires extraordinary patience and discipline, as well as crucial know-how when choosing stocks.
Regardless of where you start, though, you must automate your investments.
Automate Your Investments
When you arrange to have a set amount of cash taken out of your bank account or paycheck every month and invested in a pre-determined, diversified portfolio, it's considered automatic investing.
Contributions to retirement plans at work are an excellent example of this. If your company withdraws money from your cheque each pay period and instantly invests in a retirement plan, you've automated your investing right there.
What we recommend is you use the same method to fund other accounts too (such as a TFSA or RRSP) and invest on autopilot. We strongly recommend you put money (on autopilot) into a Tax-Free Savings Accounts (TFSA), which is one of the best tax-advantaged savings accounts you can have.
A TFSA is a savings account that doesn't apply any taxes on your contributions, dividends, capital gains, or any other interest earned within the account. Also, you can withdraw funds tax-free.
Now, it's easy to brush aside these types of contributions. In fact, many people just see what they have left at the end of the month (if anything) and throw that into a high-interest savings account.
Instead, you should set up a repeating transfer from your chequing account directly to a TFSA investing account. Say, for example, you can put away just $100 a month to start. Set up a $100 transfer into a TFSA investing account on the very first day of every month, and $100 will instantly get sent out to the account.
This may seem like nothing, but just $100 a month over 30 years at a modest 6% return equals over $100,000 in cash. That's pretty great.
And remember, with a TFSA, interest earned and capital gains are not taxed, but there are contribution limits (e.g. $6,000 for 2019).
By making things automated, you can actually change the way you spend so your investment savings objectives are considered a necessary expense, just like rent. If you deal with the $100 for a TFSA investing account (using the previous example) as you would utilities or a car payment (needing to set money aside for it as a recurring expense), it'll help keep you on track and you'll soon learn to live without that money. Meanwhile, your investments will be building and building.
Putting financial resources on autopilot will ultimately save you both stress and time. Just make sure to stay the course and check in on your accounts often.
What Is Dollar-Cost Averaging and How Will It Help?
Dollar-cost averaging is a self-disciplined approach for investors to create wealth in their portfolio over time, while at the same time allowing them to steer clear of emotionally driven decisions.
When stock prices are low, one of the benefits is buying more shares. When prices go up, fewer shares are purchased. Over time, though, this evens out, and you can build a robust portfolio.
One positive aspect of the approach is that a minimal amount of cash may be invested until your pay increases, or until you can learn about far more sophisticated investments, such as exchange-traded funds that commonly concentrate on a particular industry or sector.
Most people incorrectly think they need to have tens of thousands of dollars to begin investing for their golden years. This triggers them to become risk-averse and often prevents them from establishing a standard investment account or other tax-advantaged savings vehicles, like the TFSA or RRSP. Nearly anyone can get started with dollar-cost averaging, too. This style of investing can help novice investors who have recently opened an investment account who don't have a large sum of money for an initial investment.
Investors that abide by the dollar-cost averaging approach will invest probably one or two times a month right into a particular asset, for instance, stock funds or ETFs.
The most ideal technique to develop long-lasting wealth is just to buy shares in a vastly diversified income fund, periodically, no matter if the market has gone up or down recently.
When a fixed amount of money, such as $100, is invested every month into a fund, such as a mutual fund or ETF, or an RRSP or a TFSA investing account, that's dollar-cost averaging. Dollar-cost averaging allows investors to put their investment strategy on autopilot. It's a set-it and forget-it wealth-building approach.
Use an Online Brokerage
Discount brokerages, such as Questrade, provide an excellent online trading platform for DIY investors to buy and sell securities on their own instead of relying on a human broker to execute transactions. The fees for discount brokerages are rock bottom and the best bang for your buck – but the catch is that you have to build your portfolio yourself.
With a little know-how, DIY investors can take advantage of:
- The flexibility to choose and manage your own investments, including commission-free ETFs
- Low per-transaction trading costs and low management fees (around 0.15% to 0.5%)
- Access to real-time data, research tools and analysis
As a DIY investor, you can do your own stock-picking research and investment decisions. Fortunately, figuring out how to invest online in Canada is fairly simple, and buying stocks with an online brokerage can be as easy as entering a stock ticker symbol and the quantity of stock before hitting the “Buy” button.
There are plenty of online brokerages to choose from in Canada, but Questrade stands out as the best of the bunch. With their rock bottom low fees and super easy online trading platform, Questrade is consistently our top pick for the best online brokerage in Canada.
Get $50 in free trades when you start investing with Questrade.
Alternatives to Using a Discount Brokerage
A discount brokerage like Questrade is the simplest and best way to start buying stocks. But if you're not ready to take the plunge into DIY stock-picking, there are alternatives:
If the DIY route is intimidating and you're not ready to pick stocks yet, you can invest in stocks with the help of a robo-advisor. Robo advisors will automatically create a diversified, balanced portfolio based on your individual preferences, like time horizon and risk tolerance. Plus, they offer fees much lower than a bank or brokerage — saving you even more money eventually.
Once set up, your portfolio is managed automatically using sophisticated software algorithms. With robo advisors, you benefit from:
- Investments selected and managed for you
- A fixed portfolio that matches your risk tolerance
- Low annual management fees (under 1%)
- Not having to re-balance your portfolio once a year
The bottom line: robo advisors are an excellent alternative for investors who don’t want to do the work themselves, but also want to avoid high fees charged by a full-service brokerage.
With its low fees, easy-to-use platform, and excellent customer service, Wealthsimple is our top choice for the best robo advisor in Canada. However, if you want to compare robo advisors in Canada head-to-head, read our Complete Guide to the Best Robo Advisors in Canada.
Get your first $10,000 managed for free for a year when you start investing with Wealthsimple.
You can buy stocks through a full-service brokerage. Full-service brokerages have teams of dedicated investment advisors and financial planners on hand to “actively” manage your investments and provide expert recommendations. These brokerages also offer tax advice and can help with retirement or estate planning.
However, these services come at a premium, with high fees and commissions even if you don’t make use of all their services. In Canada, actively managed mutual funds can cost investors a fortune in fees (around 2-3% of their total portfolio annually), with many Canadians trusting that their fund manager is an “investing wizard” who can deliver high returns. But it’s quite the contrary: evidence shows that actively managed mutual funds in Canada don’t necessarily perform well long-term. Even when actively managed mutual funds match or outperform the market performance, those extra earnings may end up in the fund manager’s pocket, since they take such a big cut through fees.
Fortunately, full-service brokerages aren’t the only way to buy stocks anymore, and many savvy investors are turning to online brokerages and robo advisors in Canada to make their investments.
Can You Buy Stocks in Canada Without a Broker?
It is possible: some established companies will let you buy stock from them without a broker through a direct stock purchase plan (DSPP). DSPPs were conceived ages ago to let smaller investors buy shares without going through a full-service broker.
You can also buy stocks without a broker through a company’s dividend reinvestment program (DRIP). DRIPs let investors automatically reinvest cash dividends to buy more shares. This helps to save on trading fees for investors that reinvest their dividends regularly.
While investing without a broker is possible, there isn’t any reason to avoid opening a brokerage account. These days, you might consider this as an add-on option. Individual companies will have their own specific instructions on how to sign up for these plans, search for them online if you’re interested.
Smart Investment Strategies to Reduce Risk
Stock prices are volatile by nature. They’re up one day and down the next depending on things we can’t control – like company performance, industry trends, or politics. There’s simply no way to tell how well a stock will do, regardless of how well it’s done. When it comes to the risk of market timing, there are a few things you can do to protect yourself:
Diversify Your Portfolio
Don’t keep all your eggs in one basket. “Diversification” means holding as many eggs (companies) in as many baskets (industries) as possible. This way, if one company or sector fails, you won’t lose your shirt because you still have money invested somewhere else.
Diversifying a portfolio with individual stocks can get pricey and will take time for a new investor. If you’re a new investor, consider starting with ETFs. For example, buying the broad market iShares CDN Composite Index Fund (XIC) ETF means you’d be invested in 245 companies, instead of just one.
The overall price of the ETF can still go down, but it won’t fluctuate as much if a few of the 245 companies aren’t doing well at any point. The ETF price will eventually go up as the companies collectively do well.
Invest in ETFs and Index Funds
Smart investors don’t try to beat the market, and instead, try to match total market performance by putting their money into low-fee funds, such as index funds and exchange-traded funds, which hold all (or nearly all) the stocks or bonds in a particular index. Then, they check on their portfolio once a year.
Last Word on How to Invest in Stocks
All said and done, choosing between different online brokerages or robo advisors comes down to finding the one that best suits your needs. If you’re comfortable with DIY investing and you're ready to pick stocks, give an online brokerage like Questrade a try. Since you get $50 in free trades when you start investing with Questrade, it’s an excellent way to test-drive the trading platform.
If you’re worried about the time it takes to learn about how to invest in stocks in Canada, consider starting with a robo advisor like Wealthsimple that can set up a portfolio of ETFs until you figure out the ins and outs of DIY stock picking. You’ll also get your first $10,000 managed for free for a year when you start investing with Wealthsimple. It's a good way to test the waters before starting to pick your own stock with an online brokerage like Questrade.
Whatever you decide, experts agree that investors with the patience to hold a broadly diversified portfolio of investments over a long period, say 20 years, have the best chance of positive gains Don’t let the fear of the stocks keep you from the rewards that come from investing. It takes a while to learn how to swim, but if you invest early and invest often, you’ll find that you can keep swimming until you eventually reach a beautiful sunny little beach.
Here are a few key terms and core concepts of Stock Market Terminology you should know before diving into the investment world:
Portfolio: A collection of investments owned by an investor, can include stocks, bonds, and ETFs.
Bear Market: A period of falling stock prices.
Bull Market: A period of rising stock prices.
Stock Market Index: A benchmark used to describe the stock market or a specific portion. It's also used by investors and investment managers to compare investment returns. A portfolio of an investor's actively traded stocks that returns 10%, for example, will have underperformed if an index returned 12%. Indexes include the S&P500 in the US and the S&P/TSX in Canada.
Initial Public Offering (IPO): The first time a company issues shares on an exchange for sale to the public.
Stock Symbol: A one to four character alphabetic abbreviation that represents a company on a stock exchange. For example, Apple's stock symbol is APPL.
Earnings per share (EPS): The company's profit divided by the average number of shares in the market. This is an indicator of a company's profitability.
Price/Earnings Ratio (P/E Ratio): The stock price divided by a company's earning per share (EPS). An indicator of demand, the P/E ratio determines the price an investor will pay to receive one dollar of the company's earnings.
Dividend: A portion of a company's earnings paid quarterly or annually to people that own the company's stock. Dividends are not guaranteed even if they've been paid in that past.
Bid Price: The price that a buyer is willing to pay for a share.
Ask Price: The price that a seller will accept for a share.
Bid/Ask Spread: The difference between the lowest ask price and the highest bid price.
Market Order: A buy or sell request to get carried out right away at the present market value. Provided that there are ready sellers as well as buyers, market orders are usually completed.
Limit Order: A request to sell or buy a stock at a specific rate, or perhaps much better, but is not always guaranteed to be executed. A sell limit order may solely be fulfilled at the limit price or higher, and a buy limit order may strictly be performed at the limit price or less.
Stop-Loss Order: As soon as the stock reaches a specific price, a stop-loss order can be placed with a broker to sell or buy. A stop-loss order is typically meant to restrict an investor's loss on a stock position.
Stop-Limit Order: A stop-limit order can be fulfilled at a defined price, or higher, right after a provided stop price has been achieved. As soon as the stop price is met, the stop-limit order ends up being a limit order to sell or buy at the limit price (or higher).
Margin: Buying on margin is the act of obtaining cash to purchase securities. The margin is the cash borrowed from a brokerage firm to purchase a financial investment. It's the difference between the overall value of securities kept in an investor's account and the loan amount from the broker. It's considered high-risk because the person is buying investments with money they don't have, and it's definitely not a strategy that should be used by beginners.
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