How to Invest

how to investAll of us understand the importance of working hard. But often, the secret to financial success is more than your own sweat – it’s about being smart about your investments and making your money work equally hard for you. However, knowing how to invest can seem overwhelming for first-time investors. Luckily, we're here to help you get started!

Money is one of the most valuable assets you can have. If you don’t use it well or just keep it stashed under the mattress, it loses value over time due to inflation. But if you put your money to good use by investing it patiently, your net worth rises slowly but surely.

The article below gives tips on how to invest, as well as different investments you can pick according to your financial situation and comfort level.

How to Invest in Stocks

The first step is to choose an investment provider. Let's look at the options.

Bank

The first place where people would consider stashing money for a return would be in a bank’s chequing or savings account. However, opting for banks presents a problem.

Historical data has proven that stock market gains always trump interest rates offered by banks. By choosing banks, you lose out on the opportunity of investing in stocks.

So, if a bank isn’t a good option, then what other avenues are available for putting your hard-earned cash? Let’s look at some other alternatives.

Stock Broker

Stocks are traded on an exchange, such as the New York Stock Exchange or the Toronto Stock Exchange. If you’re looking to buy stocks, you’ll need to work with some type of middle person who facilitates stock trading. In this case, the middle person is called a stock broker.

Advising on the best times to buy and sell a stock is the bread and butter of a stock broker, and it’s their job to lock in the best price possible for a trade. In return for facilitating trades and their recommendations, a stock broker charges a commission either as a flat fee or for a small value of the transaction.

The advantages of a stock broker are numerous, and they include access to markets which others may not, including foreign stock markets. Top stock brokers can also facilitate trades for different financial services such as mutual funds and bank products (such as mortgage-backed securities). We’ll be discussing mutual funds later in this article.

Stock brokers also provide valuable insight through research that’s of value to clients who are clueless about investing in the stock market.

Different stock brokers offer various add-on services such as personal brokering and more tailored advice. The more services you choose, the larger you’re expected to pay. Try finding the brokerage best suited for your financial needs as various brokers charge different commissions.

Discount Broker

A discount broker does the same job as a stock broker – facilitating the trading of stocks, with the only difference being that they offer no direct investment advice.

Brokerage accounts are split into two main categories. A full-service brokerage account offers financial services related to investing such as financial planning, the impact of taxes, research, and more. The downside of choosing this type of brokerage company is that they’re expensive.

Discount brokerage accounts are usually present via an online platform which essentially provides a self-service option for investors. The fees charged by discount brokerages are low compared to stock brokers because you make your investment decisions on your own with little to no help.

Discount brokerages, like Questrade, have lowered the barriers for entry into stock trading for average investors. A decision to choose between a discount broker and a full-time stock broker relies on the financial situation, knowledge, and goals of the investor.

Full-time brokers are a better option for people with no financial experience or those who need reliable advice. Investors who don’t need advice and have small trade volumes can choose discount brokers.

You’ll find a detailed comparison between online brokerages in Canada in our article on The Ultimate Guide to Canada’s Discount Brokerages. Also, here’s a handy chart of the online brokerages in Canada to help find one that’s right for you:

Online Investing PlatformQuestradeBMO InvestorLine Self-DirectedVirtual BrokersQtradeScotia iTradeTD Direct Investing
Annual Fees$0> $25,000 = $100
< $25,000 = $0
> $25,000 = $100
< $25,000 = $0
> $25,000 = $100
< $25,000 = $0
> $25,000 = $100
< $25,000 = $0
> $25,000 = $100
< $25,000 = $0
Free ETF TransactionsYesNoYesUp to 100 trades =$0LimitedNo
Basic Trading Fees$4.95 - $9.95$9.95$9.99$8.75$24.99$9.99
Possible ECN FeesYesNoNo for retail clients, yes for commission-free clientsNoYesNo
Account minimum$1,000No$1,000NoNoNo
Paid Transfer FeesYesNoUp to $150Up to $150NoUp to $150
Start InvestingVisit QuestradeVisit BMO InvestorLineVisit Virtual BrokersVisit QtradeVisit Scotia iTradeVisit TD Direct Investing

Robo Advisor

Robo advisors are investing platforms that use a computer algorithm to design and manage your investment portfolio. This creates a hands-off approach to investing. Robo advisors tend to do things like select investments or investment classes for you, build a portfolio based on pre-defined risk tolerance, and automatically rebalance that portfolio for you.

The core function of a robo advisor is to evaluate a ton of financial data, identify emerging trends, and factor in external threats to chalk out a financial path. Their algorithms predict the movement of prices of different stocks and thereby provide insightful information on when to buy and sell stocks in your portfolio. Because of this, robo advisors operate in a “set it and forget it” manner.

Robo advisors, like Wealthsimple, are useful for first-time investors, as they offer guidance on investing and construct a diversified portfolio based on your personal financial needs. The robo advisor platform will give advice that's specific to your financial goals, whether you're looking to build wealth, buy property, or save up for retirement.

You can find robo advisors in the form of apps or online platforms, each offering a varying fee structure. Some robo advisors come in the form of a high one-time fee while others are a combination of fixed and commission-based fees on each transaction.

If you think a robo advisor might be the best route for you, read our guide to Best Robo Advisors in Canada 2019. Here’s a quick comparison chart we’ve put together as well, so you can determine which path is best for you:

Brand Special FeaturesFees Minimum Balance
WealthsimpleSpecial perks for those who invest over $100,000; amazing interface.0.4 - 0.5%/year
+ average 0.20% MER
None
BMO SmartfolioOwned by BMO; high level of human interaction0.4 - 0.7%/year
+ average 0.24% MER
$1,000
Questwealth PortfoliosTakes a hybrid approach with its investments; rewards large deposits with lower fees0.20 – 0.25%/year
+ average 0.19% MER
$1,000
Nest WealthPricing and investments gear towards mature investors$20 - $80/month + average 0.13% MERNone
JustwealthPersonal advisor; large selection of ETFs0.4 - 0.5%/year
+ average 0.25% MER
$5,000
ModernAdvisorCFA charterholder-crafted portfolio; ability to get a personal advisor for an additional fee0.35 - 0.5%/year + average 0.25% MERNone

Financial Advisor

Financial Advisors act as a personal consultant to helping you manage your investments. Where a robo advisor takes the work out of your hands entirely, a financial advisor will sit down with you, face-to-face in many cases, and develop a plan of action that fits your needs.

Because of this personalized and higher-touch service, financial advisors tend to charge higher fees than that of an online brokerage or robo advisor. There’s overhead (e.g. office space) and you’re paying for someone’s advice (like any other consultant) – so you’re going to pay a premium.

Financial advisors aren’t necessarily bad, they just aren’t for everyone. If you’re someone who values talking to someone about your money and wants input and/or deeper insight on how your money is being managed, a financial advisor might be the right option for you.

Types of Investments

There have been many developments in the world of finance in terms of creativity over the years. Investors can now choose from a diverse pool of securities to invest their money and seek a return. Discussed below are some paths open to everyday investors looking for a return on their money.

Stocks

Stocks are the shares (parts) of a company listed on a stock market for people to purchase. Every stock owned by you represents your ownership in a company. With ownership come voting rights and a portion of the profits earned by the company. Most stocks today are available as common stocks.

Common stocks give the holder the right to vote and elect the board members of a company, (i.e. the individuals in charge of major decision-making). Common stocks also represent a portion of profits distributed by the company in the form of dividends. Payment of these dividends takes place annually or semi-annually, depending on the company’s policy.

From a long-term standpoint, common stocks yield a higher return as compared to other financial securities in terms of capital gains. Capital gains are the increased returns of an investor caused by an increase in stock price.

There is no upper limit to the price ceiling of a stock price as it depends mainly on two factors:

  1. The company’s financial health, and
  2. Market speculation

However, there is a downside. If bankruptcy occurs, the stock price could hit zero, resulting in almost no returns for the investor.

Historically, stock markets have provided the most favourable returns. They’re also relatively liquid and regulated which ensures that companies can’t (legally) offer misleading financial statements.

Investing in the stock market is an excellent opportunity for people looking to build wealth over time and save their money from moderate inflation. For conservative investors who don’t like altering their principal amount (number of shares), consistent dividend-paying stocks are the best. The stock market is a level playing field for all investors. The sooner you start, the better it is, as you can accumulate more wealth.

Bonds

Bonds are issued mainly by companies, governments, and municipalities (provinces/cities) to raise cash in exchange for timely payment of interest on a fixed rate. Bonds issuers are primarily looking to raise some money through debt. In exchange, they pay interest payments and finally the principal amount after the period. It’s basically like a loan agreement.

Bonds vary in duration of their length. Some bonds are issued for six months, some for five years, and some Canadian bonds are even issued for greater than ten years. The greater the length of the bond, the higher the interest rate on it. The timeline of when a bond is set to expire is called maturity date, and on this date, the issuer repays the full amount to bondholders.

There are two ways to get a return by investing in bonds:

The first is the straightforward way of holding the bonds till maturity date while collecting the interest payments and then eventually collect the principal amount on the maturity date. The timing of interest payments on bonds depends on the issuer, but it’s usually twice a year.

The second way is to sell them at a cost higher than what you paid for.

In finance, a higher risk bears a higher reward and vice versa. Bonds are considered a lower risk investment than the stock market because you’ll get your interest payment until the company defaults.

The best evaluator for a bond’s worth is to use the standards set by bond rating agencies. Higher-rated bonds earn lower interest rates and sell for higher prices, whereas lower-rated bonds offer higher interest rate as they've got a risk of default.

Bonds are generally considered a safer option than the stock market. Since they’re considered less risky, their returns are also significantly lower than the stock market. People who don’t want to take risks or have heavily invested in the stock market can consider diversifying their portfolio with the purchase of bonds.

Options

An option grants the holder the right, but not the obligation, to buy (call) or sell (put) shares of a company at a stated price (strike price) at a specific date.

There are two kinds of options, namely American and European. European options only allow the option to be exercised at a particular date, whereas the American option can be exercised at any time between purchase and expiration date.

There are two main stock options widely available in most stock markets: calls and puts.

  • A call option gives you the right but not the obligation to buy shares of a company at a specific price, called the strike price, within a limited time frame (or a particular date if a European option occurs). A call option is bought when the investor anticipates a rise in the stock price or underlying security.
  • A put option is a contract granting the holder the right, but not the obligation, to sell shares at a stated strike price within a set period. A put option is bought by an investor who anticipates a drop in the future price of a stock or the underlying security.

Mature investors can also hedge against risk by choosing an options strategy, which involves the use of call options and put options. In an options spread strategy, investors purchase and sell the options for the same underlying stock or asset but at a different strike price and/or expiration date.

Options are exercised by investors who believe that a particular stock price or asset price will fall or rise but don’t want to put up a lot of cash up front. Options are valued based on their premiums (i.e. the amount of money that’s paid to the seller of an options contract).

The premium of an option is primarily based on the strike price along with other factors such as volatility of the asset and expiration date of the contract.

Options are garnering a lot of attention due to their profitability but also remain one of the riskiest paths to take as they can decrease the value of a portfolio drastically in a short period.

Trading in options is most definitely not a strategy that should be sought out by beginners. It should be exercised after considerable exposure to price movements in the stock market or the underlying security/commodity.

Exchange-Traded Funds (ETFs)

An exchange-traded fund (or ETF) is an investment fund that lets you buy a large pool of individual stocks or bonds in one purchase. It tracks stock indexes like the S&P 500, different commodities, bonds or a bunch of assets grouped together.

It’s easy to confuse ETFs with mutual funds (to be discussed later) as they also offer a bundle of different investable assets. ETFs trade like a standard stock on the stock market with price fluctuations being observed as they’re traded.

Most well-known ETFs track stock market indexes, but lots of different ETFs follow commodity prices, foreign currencies, and bonds among different groups of assets. In simple terms, an ETF is a fund of different assets (stocks, silver, oil, different securities, etc.).

It distributes ownership of the whole pool of assets into a single share ready to be traded like a common stock. Besides making capital gains on ETFs, investors also benefit from profits distributed in the underlying ETF asset pool such as dividends and interest rates.

ETFs are a good option for people looking to invest for higher returns but with little financial knowledge. Such folks can invest in well-known stock indexes without worrying about individual company stock prices or performance.

Mutual Funds

A mutual fund is essentially a pool of various stocks and bonds grouped together in a single investment portfolio. The managers of the fund assimilate the different assets into shares and calculate the share price daily under the price fluctuations of each asset within the pool.

Investing in a mutual fund differs from shares or bonds as the pool represents a collection of various assets. Investors earn money when the stocks within the pool generate dividends and on interest payments from the bonds. Assets sold by the fund at a higher price also create a capital gain distributed by the fund to its shareholders.

Mutual funds are best for people with deep pockets but no interest or knowledge of the financial world. Mutual funds are managed by Fund Managers who get paid even if the fund incurs a loss.

Other Investments

The securities listed above are the most common (and our highest recommended) forms of investment. Here are a couple of others that we recommend after you've tested those:

Real Estate

People who aren’t comfortable with financial instruments can choose more conventional markets such as real estate. Though it requires higher cash up front than bonds or stocks, there is an increasing number of real estate portfolios where you can invest a relatively smaller amount for a tiny piece of a real estate project. For people who aren’t well-versed with the housing market, companies like Roofstock offer vetted homes ready to be sold and rented out.

Cryptocurrency

As technology progresses, so do the methods of investing. Termed as the future of finance, cryptocurrency is essentially a digital form of currency not regulated by any central bank.

Instead, it’s managed by the people who use it and buy it. As trust in banks erodes, cryptocurrencies are garnering attention as an alternative to conventional currency.

There are even crypto-exchanges and indexes emerging which facilitate investment in this alternate financial instrument.

The drawback is there are no perfect indicators for predicting the price of cryptocurrencies. It’s purely based on individual demand and supply speculation.

Constructing the Optimal Portfolio for Your Needs

First, consider your needs and your ability to take risks before building your investment portfolio. A recent university graduate would have an entirely different portfolio as compared to a person close to retiring.

The more risk you’re willing to take, the more aggressive your investments will be. This means a large pool of funds for a risk-taking investor will be allocated to equities and bonds while fixed-income assets will constitute a lower value. An aggressive risk-taking portfolio can contain almost 90 percent in stocks, 5 percent in bonds, and 5 percent in cash for setbacks.

A conservative portfolio is geared towards people who want to take on less risk. The main aim of a conservative portfolio is to retain its value and protect the investor from losses. A conservative portfolio would comprise 40 to 60 percent fixed income securities like bonds and the rest in a mix of stocks and cash, to provide a cushion for any rebalancing required.

Once you’ve selected the composition of your portfolio, now consider the different stocks and bonds you’d invest in. There are different types of stocks, with some offering higher dividends as opposed to others but lower capital gains. On the same note, there are different types of bonds with varying maturity dates and interest rate payments.

Once you’ve built your portfolio, you’ll need to keep assessing it since market conditions might distort your preferred percentages of each asset class. Even if the market doesn’t erode the percentages, your preferences might change. After accumulating enough capital, you might be encouraged to take on more risk. Here, you must reassess your portfolio composition.

While rebalancing your portfolio under your risk tolerance, always remember the tax impact and market trends. If you believe that a particular industry or company in your portfolio will fall in value, you need to sell it off. Do this only after looking through market reports and research.

When constructing and rebalancing your portfolio, always remember that diversification is a vital key to success. Never let your portfolio rely too heavily on a particular industry or bond type. A well-diversified portfolio is more sustainable and hedges you against unforeseen changes in the economy.

Investing Tax-Free

Believe it or not, there are ways to invest tax-free in Canada. Here are some of the best options:

Registered Education Savings Plan (RESP)

An initiative undertaken by the government of Canada, a Registered Education Savings Plan (RESP) promotes savings in the form of an investment in a child’s college education. The government allocates a certain percentage to match the contributions under the plan for children under the age of 18.

Contributions to the plan aren’t taxed until the fund is taken out. Even then the original contributions aren’t taxed, only the earnings are. Parents can open an RESP at most financial institutions (including robo advisors and online brokerages) in Canada, and almost anyone can pitch in, including relatives, friends, and neighbours.

The government matches the contributions for a maximum of $2,500 per year, and the total grant by the government doesn’t exceed $7,200. If the child doesn’t attend college, then the contributor to the RESP will be awarded the amount.

The RESP is easy to start and provides a strong incentive to save for a child’s education. The drawback is that any funds that get drawn out from the plan and spent on purposes other than education result in a 20 percent penalty in addition to income tax.

Tax-Free Savings Account (TFSA)

Introduced in January 2009, a Tax-Free Savings Account (TFSA) is a registered account in Canada that offers special tax benefits. Within a TFSA, you can hold any type of savings or investment account – cash, GICs, mutual funds, stocks and bonds – and any income earned is tax exempt (even when withdrawn).  This means any earnings are compounded tax-free over time. Canadians who were at least 18 years of age in 2009 can have up to $63,500 total in a TFSA.

If you’re confident managing your own portfolio, you can open a TFSA with an online brokerage like Questrade. If you're a new investor or feel more comfortable with someone else doing the hard work, choose a robo advisor like Wealthsimple or Questwealth Portfolios.

The TFSA contribution limit in 2019 is $6,000, meaning you can deposit no additional funds beyond that limit for that year. Otherwise, a 1 percent penalty is imposed each month until the extra amount is withdrawn from the account. You can withdraw funds from the TFSA at any time while incurring no taxes on the gains you made. However, you won’t be able to replace the amount of withdrawn until the following year.

Registered Retirement Savings Plan (RRSP)

A Registered Retirement Savings Plan is an initiative by the Canadian government to promote saving for retirement. Pre-tax income is deposited in an RRSP account where the money increases with no charging of taxes on any gains realized. This remains the case until the money is withdrawn.

Funds deposited in an RRSP account enjoy tax-free gains on dividends, capital gains, and even interest rates. RRSP holders can withdraw their funds at retirement when taxed much lower as compared to when they were working.

Like a TFSA, you can open an RRSP with an online brokerage like Questrade, or a robo advisor like Wealthsimple or Questwealth Portfolios. Many asset classes are approved for RRSP. These are:

  • Stocks
  • Bonds
  • ETFs
  • Mutual funds
  • Foreign currency
  • Savings account

With RRSPs, you get a tax deduction in the year you make a contribution. An RRSP beneficiary may withdraw funds at any time, though they’re taxed when they do.

How Much to Invest

This puzzles most investors when starting to take their first steps in their financial world. The answer lies mainly on what your goals are for investing.

The first step is to form a correct balance between investments and savings. Savings are necessary to hedge you against any emergencies that might prop up. The percentages are up to your preferences in risk-taking and financial goals.

To start investing, you need to have some form of savings to start off with. After that, you can allocate a fixed part of your income towards investing and saving. For recent college grads who know how to live on a budget, an extreme rule of thumb is to save at least 60 percent of your salary.

Those who are more settled and/or have a family to look after should save and invest at least 30 percent on their income. 20 percent of this should be geared towards investments that could be used for saving towards important milestones, like retirement and children’s education. The remaining 10 percent should be saved.

One thing you should remember about investing is that the more invest today, the faster you’ll reach your financial objectives. Every dollar not being invested is being eroded by the curse of inflation.

Not that you should take this rule to an extreme, but many investors who re-invested most of their gains are now multi-millionaires (and billionaires) such as Warren Buffet and Kevin O’Leary.

General Tips for Investing

To close it up, I’ll give you two quotes I think are incredibly powerful when it comes to thinking about how you invest.

“The intelligent investor is a realist who sells to optimists and buys from pessimists.” -Benjamin Graham

A fundamental rule of investing is that when the market pendulum swings to a side, swing to the other side. This implies that when the whole market is in a buying frenzy, gear towards selling and vice versa.

This philosophy further entails keeping your emotions in check and not giving in to market pressure or hot stocks that everyone is talking about. Most people suffered terrible losses when they jumped on the bandwagon of the dotcom bubble during the late 1990s. However, investors with a level head and impulse control steered clear of market speculation and avoided such losses.

“Someone is sitting in the shade today because someone planted a tree a long time ago.” -Warren Buffett

Always remember to stay focused on your goals and not give in to short-term gains. Investing requires patience and a clear head. The stock market is ripe with speculation and educated guesses that result in minuscule swings sending traders into a panic.

Stick to your strategy and think long term. If your investment is in a stable/healthy company, the gains will show up eventually overtime regardless of market speculation.

Conclusion

Learning how to invest doesn’t occur overnight. It’s a long process that often includes failing quite a bit. I’ve failed many times as an investor, but as long as you fail fast and learn from your mistakes, you can figure out the complexities of the stock market in no time.

That being said, there are other options to invest your money that are safer and require little to no effort or knowledge. Just know you’ll end up paying a premium for these options.

Regardless of what you choose, know that investing is critical, and you’re losing money by not putting your money to work for you. The question is – what will you do now that you have this knowledge?

Disclaimer: Young & Thrifty has entered into a referral and advertising arrangement with Wealthsimple US, LTD and receives compensation when you open an account or for certain qualifying activity which may include clicking links. You will not be charged a fee for this referral and Wealthsimple and Young and Thrifty are not related entities. It is a requirement to disclose that we earn these fees and also provide you with the latest Wealthsimple ADV brochure so you can learn more about them before opening an account.

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Chris Muller
Chris Muller is the founder of Money Mozart, where he blogs about personal finance, frugality, and living below your means. He's currently on the pursuit of early retirement while trying to figure out how to be a dad for the first time. You can connect with Chris on Twitter @moneymozartblog.
Chris Muller

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