Finance

How to Buy Stocks in Canada: All You Need To Know

So, you have no idea how to buy stock in Canada, but you’re a smart person interested in investing. In this article we look at how you can start buying stocks in Canada, especially since online methods are becoming more and more straightforward. Wherever you live in Canada, it’s better if you learn how to invest in stocks. Investing is not only for the bankers nestled among the high rises of Toronto’s skyline.

How to Invest in Stocks in Canada

In order to buy stocks in Canada you can basically start with as little as $100. Second, you need to open a brokerage account through e-brokerage services. Lastly, you must put together a diversified, balanced portfolio by buying stocks, bonds, mutual funds, ETFs or socially responsible investments. 

What Do I Get After I Buy Stocks? 

After buying a stock you will receive ownership (or a “share”), over a small portion of the company. As the new owner, you’re entitled to a cut of the company’s profits. The more shares you aquire, the higher your stake in the company. For example, if a company has 1000 shares, and you purchased 100 shares, you would own 10% of the company.

The more stakes you have, the larger are your privileges which give you the right to receive dividend payments and the right to vote at shareholder meetings.

Types of Stocks: 

Usually, Common stock and Preferred stock are the two types of stocks. 

  • Common stock is usually purchased at a price set by the market, and represents ownership in a company. You can collect money from investing in this type of stock either through stock appreciation or dividend payments. However, not all stocks offer dividend payments. Those who own a common stock will get to vote at shareholder meetings.
  • Preferred stock: Here the ownership and potential appreciation features of common stock combined with the consistent income a bond provides. Preferred stock has a stated par value and the dividend payment is a percentage of this value. These types of stocks come with higher risk than investing in common shares. While shareholders  get no voting rights,they do get top priority on claims to a company’s assets and income.

ETF vs. Index Mutual Funds

  • Exchange-traded funds (or ETFs) are a basket of stocks packaged together to copy the performance of a stock market index. Basically, it’s an investment fund that lets you procure a large basket of individual stocks or bonds with just one purchase.
  • A mutual fund is in the same family of the ETF, but with a much higher price tag. A MF is looked after 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 to a MF, an ETF looks to copy the performance of a stock market index, which is part of a “passive investing” strategy.

How Do I Choose A Stock? 

Every stock needs research because choosing a stock is hard, sometimes even sophisticated analysts struggle. There are many methods to evaluate how any stock is valued. When it comes to picking individual stocks, you must crunch the numbers. This is because there is no way of knowing  if the future price of a stock will go up or down. For selecting ndividual stocks, it is very possible to win sometimes – just be prepared to lose too. That risk is only part of the process.

Number 1: Start Broad

When you first start investing don’t go picking individual stocks right out of the gates. We recommend that you make yourself comfortable with investing and pick a few ETFs, index funds, or mutual funds first. By doing so, you understand how the market works, keep costs down, and immediately end up diversifying your portfolio! 

As you get more comfortable with investing, a great place to start is by looking into value investing or (VI). VI is a methodology that was first created by Benjamin Graham but is the foundation of investment strategies for folks like Warren Buffet today. Such investing requires extraordinary patience and discipline, as well as crucial know-how when choosing stocks.

Keep in mind though: No matter where you start, you must automate your investments.

Number 2: Automate Your Investments

As you have a set amount of cash taken out of your bank account or paycheck every month and invested in a predetermined, diversified portfolio, we call this automatic investing or auto-pilot investing. 

With this method, you get to put money for your retirement plans. If the company you work for withdraws money from your cheque each pay period and instantly invests in a retirement plan, you’ve automated your investing right there.

So you use the same method to fund other accounts too (such as a TFSA or RRSP) and invest on autopilot. One good tip to use now is to put your money (on autopilot) into a Tax-Free Savings Accounts. 

A TFSA can be one of the best tax-advantaged savings accounts you can have! As the name suggests, it is a savings account that doesn’t put any taxes on your contributions, dividends, capital gains, or any other interest earned within the account. Also, you can withdraw funds tax-free.

Most people just see what they have left at the end of the month (if anything) and throw that into a high-interest savings account. But it’s actually in your best interest to set up a repeating transfer from your checking account directly to a TFSA investing account. You can even put away just $100 a month to start. Put up a $100 transfer into a TFSA investing account on the very first day of every month, and $100 will immediately 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, amazing! And remember, with a TFSA, interest earned and capital gains are not taxed, but there are contribution limits (the limit was $6,000 for the year 2019).

By going on auto-pilot with automatic investments, you change your spending habits too. Investment savings objectives are considered a fixed 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.

Thus, letting financial resources go on autopilot mode will ultimately save you both stress and time.  Just make sure to stay the course and check in on your accounts FREQUENTLY. 

Number 3: Dollar-Cost Averaging

Dollar-cost averaging is an 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. If the stock prices are low, you get to buy more shares. If the prices go up, then fewer shares are purchased. Eventually, this evens out, and you can build a robust portfolio. 

A benefit of dollar-cost averaging 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 ETFs. 

Many assume that they think they need to have tens of thousands of dollars to begin investing for their golden years. This makes people become risk-averse and often prevents them from establishing a standard investment account or other tax-advantaged savings vehicles, like the TFSA or RRSP. The truth is, anyone can get started with dollar-cost averaging, too and this style of investing can help novice investors who have recently opened an investment account without a large sum of money for an initial investment.

Investors who use 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. Ideally the technique is to develop long-lasting wealth, ust to produce shares in a vastly diversified income fund, periodically, despite 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 enables investors to put their investment strategy on autopilot. It’s a set-it and forget-it wealth-building approach.

Number 4: Online Brokerage

They provide online trading platforms 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 cheap too. The only catch is that you have to build your portfolio yourself.

Benefits of online trading platforms:

  • The flexibility to pick and manage your own investments
  • Offers commission-free Exchange-Traded Funds
  • Low per-transaction trading costs and low management fees (0.15% to 0.5%)
  • Access to real-time data, research tools and analysis

When you invest on your own, you pick your own stock with good research. These days, figuring out how to buy stocks in Canada through online brokerage is straightforward as all you have to do is enter a stock ticker symbol and the quantity of stock before hitting the “Buy” button.

Substitutes to Using a Discount Brokerage

If you’re not ready to take the plunge into DIY stock-picking, there are alternatives:

Robo Advisors

If you cannot invest on your own, then take the help of a robo-advisor to pick and invest stocks. They are an excellent alternative for investors who don’t want to do the work alone and want to avoid high fees charged by a full-service brokerage.

Robo advisors automatically design specifically a diversified, balanced portfolio based on your individual preferences such as time horizon and risk tolerance. Moreover, they offer fees much lower than a bank or brokerage, saving you even more money eventually. After it is set up, your portfolio is managed automatically using sophisticated software algorithms. 

Benefits of robo-advisor platforms:

  • No need to re-balance your portfolio once a year
  • A fixed portfolio that matches your risk tolerance
  • Low annual management fees (under 1%)
  • Investments selected and managed for you

Full-Service Brokerage

Full-service brokerages have teams of dedicated investment advisors and financial planners on hand to “actively” help you buy your investments and provide expert recommendations. These brokerages also offer tax advice and can help with retirement or estate planning. But such services do come at a premium and high fees and commissions even if you don’t make use of all their services.

In Canada, full-service brokerages (or actively managed mutual funds) can cost investors a LOT in fees (around 2-3% of their total portfolio annually). As we pay them these large sums, we trust that these fund managers will give us the desired result but evidence shows that  full-service brokerages in Canada don’t necessarily perform well long-term. Even if actively managed mutual funds match or outperform the market performance, almost all extra earnings may end up in the fund manager’s pocket, since they take such a big cut through fees.

These days 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 I Buy Stocks in Canada Without a Broker?

Certain established companies will let you buy stock from them without a broker using DSPPs. A direct stock purchase plan or DSPPs were created to let smaller investors buy shares without going through a full-service broker.

In addition to that, you can buy stocks without a broker through a company’s dividend reinvestment program (DRIP). With DRIPs you can 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 is no harm in opening a brokerage account. These days, you might consider this as an add-on option. Individual companies will have their set of instructions on how to sign up for these plans which you need to find out. 

How Can I Reduce My Risk? 

Stock prices go up one day and down the next with unpredictable reasons such as  company performance, industry trends, or politics. But there is something you can do to protect yourself when it comes to the risk of stock market timing: 

Diversify Your Portfolio

Ever heard the saying “don’t keep all your eggs in one basket” ? Who knew it would perfectly describe a diverse portfolio. What you need to do is fill up as many eggs (companies) in as many baskets (industries) as possible. Let’s say one “egg cracks” in that case, the others are all safe and will help generate money elsewhere. 

Without a diverse portfolio, 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

Good 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.

In the end, we hope that this article has given you many options and routes you need to take to buy stocks in Canada.  Whether you opt for online brokerages, DIY investing or robo advisors it comes down to finding the one that best suits your needs. One great tip is to take the time to learn about investing by choosing ETFs or MFs first. It’s a good way to test the waters before starting to pick your own stock with an online brokerage 

Keep in mind that before you buy stocks in Canada, risks and fear shouldn’t prevent you from investing now. Time wastes for no one no matter how old you are. Also remember that  investors with the patience to hold a broadly diversified portfolio of investments over a long period, say 20 years, have the biggest gains. 

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