Investing in stocks seems like a challenging endeavor. If you’ve ever wanted to start buying Canadian stocks, you’ve more than likely ran into the issue of simply not knowing where to start. In this article, I’m going to walk you through how to get started with investing step by step. If you’re looking for a quick summary so you can get started right away, here it is.
How to buy stocks in Canada:
- Have sufficient capital (you can get started with as little as $500)
- Find an online brokerage that suits your needs
- Open a TFSA, RRSP or non-registered investment account
- Fund your investment account (usually takes 3-5 business days)
- Research an investment method you’d like to follow (Stocks, ETFs, Index Funds etc)
- Monitor your investments and make changes as needed
- Adapt your strategy based on risk tolerance and portfolio size
If you’d like to get into a little more detail on purchasing stocks, you can keep on reading. Not only will you know how to get started investing in Canada after this article, but you’ll know how to pick strategies that will help you succeed. Investing just to invest doesn’t really get you anywhere. You need to know how to navigate the markets and ultimately profit more than you would from giving your money to a bank to invest.
Step One: Opening A Brokerage Account
Step Two: Buying Your First Canadian Stocks
Step Three: Evaluating What Stocks To Buy
Step Four: Developing An Investment Strategy
Step Five: Developing An Investors Mentality
Bonus Step: Click here
Looking for a visual? We’ve put the guide into video format:
The stock market really isn’t as daunting as it seems
Once deemed an action only executed by the wealthy, investing in Canada is now easier than it ever was. Gone are the days of ticker tapes feeding out stock prices and orders.
Stock prices are now available with the click of a button through your discount brokerage or even a popular search engine.
Commission costs have dropped tenfold, and Canadian investors can now start buying stocks for as little as a penny a share through a discount brokerage like Questrade. This has significantly reduced the barriers to entry for potential Canadian investors, as you can now start buying stocks with as little as $500 without commissions eating up too much of your returns.
Step 1 – Opening up a brokerage account
You don’t need a brokerage to buy stocks in Canada, but with the trouble it takes to purchase them without, you’re going to be much better off.
Brokerages have been around for ages, yet the key difference nowadays is the fact that you don’t even need to leave your computer chair to purchase Canadian stocks. In fact, with mobile apps you can often execute trades anywhere in the world in the snap of a second.
So, what brokerage do I personally recommend for buying Canadian stocks? Questrade, and it’s not even a close decision.
I’ve invested with Questrade for over a decade now and couldn’t be happier. When you can pair up with a company as prominent in customer service as Questrade, combine that with some of the best trading platforms available on the internet today and the cheapest commissions in the country, you’re on the fastest path to success.
So how exactly do you open up a brokerage account and start trading stocks?
Well, first things first open a separate tab in your browser. Second, grab our exclusive discount code to get $50 in free commissions (rx4rbzmb). And finally, simply watch this video I created to walk you through step by step how to get started with Questrade.
Step Two – Purchasing your first Canadian stock
Now that you have your brokerage account set up, you’re ready to start buying Canadian stocks. However, it’s a little more complex than that. Anyone can invest, just like anyone can pick up a golf club and try to hit the ball. It doesn’t mean you’re going to be any good at it.
And while being a bad golfer may result in only a few laughs, your money is at stake here, which is no laughing matter.
There are many ways to invest your money in Canada today. Things like bonds, ETFs, Real Estate Investment Trusts, mutual funds or even commodities can be suitable investment vehicles.
Obviously with this guide being primarily based on buying stocks (equities being the proper term) that is what we are going to be focused on.
Should you buy preferred or common stocks?
This is a question I get asked a lot, and for 99% of retail investors like yourself, the answer is going to be common stocks.
Why? Well, most often companies won’t even issue preferred stocks. Although significantly less volatile than common stocks, preferred stock prices fluctuate less, and act much like a bond in the fact that their prices change significantly based on interest rates.
Common stocks, although at the bottom of the totem pole in terms of importance, have higher risk yet much higher reward than preferred stocks.
Preferred shares are very popular with institutional investment firms, often because of their tax benefits vs common shares.
So, you’ve got a few stocks you’re interested in, how do you buy them?
With Questrade, the execution of a trade is as simple as a click of a button. However, it’s important that you know some basic order terminology before you dive in. Jumping in too quick could cost you a ton of money depending on what type of stock you are buying.
The Market Order
If you’re looking to buy a stock and buy it fast, the market order is for you. It is the most basic of all order types, as it simply tells your brokerage to buy or sell a stock with no regard for the price. Now, the brokerage will still get you the best possible price on your stock, however liquidity comes into effect.
While a market order likely won’t hurt you on a high-volume dividend stock like the Royal Bank of Canada, you may get punished severely for a stock that isn’t traded as heavily.
If you place a market order for a stock like Royal Bank, often your order will be filled within a few seconds, and for the current trading price, give or take a few cents. This is simply because of supply and demand. In a single day, over 1.5 million shares of Royal Bank could be traded.
On the contrary, with a low volume stock, someone looking to buy or sell shares of a particular stock may have set their price significantly lower or higher than the current trading price. Important to be mindful of that.
This is where the disregard for price comes in. Your brokerage will fill your order as fast as it can, and you may end up paying $25 for a $15 stock or selling your $15 stock for $5.
The Limit Order
Simply put, the limit order helps you control your price when buying or selling a Canadian stock. With a limit order, you’re able to set conditions on your purchase or sale.
If you own a $20 stock and are looking to sell, you may set a “limit” on the price of $19.50. This means that if you cannot sell your stocks for $19.50, you don’t want the order to be executed. The same applies for buying a stock. If you’re looking a stock that is currently trading at $20 and would be a buyer at no more than $21, you can set a limit on the buy order.
Like I said above, buying Canadian stocks that are traded at higher volumes more than likely won’t get you into trouble with a market order, but I suggest using a limit order any time you make a purchase. It is a very good habit to get into, and reduces the chances of you slipping up and accidentally executing a market order on a highly volatile or low volume stock.
Step 3 – Evaluating what stocks to buy
Just because you know how to buy a stock doesn’t mean you should just invest in the first one you find. Stock analysis is a skill that can take years, even decades to master. However, there are a few things I’m going to explain to you that will at least give you the knowledge to quickly identify overvalued stocks to avoid, or undervalued stocks to look at a bit closer.
The Price to Earnings (P/E) ratio
Probably the most common investment metric available to Canadian investors today, the price to earnings ratio is a comparison of the company’s stock price to its actual earnings.
The price to earnings on its own doesn’t really tell you much about a stock. A stock with a price to earnings ratio of 15 could be overvalued, while a stock with a price to earnings ratio of 30 could be severely discounted.
The key is to look at the industry average. For example, lets compare two stocks side by side. Royal Bank currently has a price to earnings of 12.6, while Constellation Software has a P/E of 52.63. It is obvious that Constellation is trading at a much higher premium than Royal Bank. However, the industry average in the Canadian financial sector is 20.12, while the Canadian technology sector has a P/E average of 283.27.
Royal Bank is trading at 59% below industry averages, while Constellation is trading 438% below.
The Price to Earnings to Growth ratio
An ingenious enhancement of the P/E ratio is the PEG (price-earnings-growth) ratio. As a rule of thumb, look for companies with a PEG close to 1.0, which implies that the market’s expectations are based on realistic assumptions about the firm’s growth prospects.
Let’s assume that the P/E ratio of a firm is 10, and the expected growth rate is 5%. In this case, the PEG is 2 (10 divided by 5). Even though a P/E of 10 might be low compared to industry average of 15, the PEG raises a huge red flag.
Return on equity (ROE)
The net income earned expressed as a percentage against shareholder investments.
Plain English: A measure of the management’s ability to use money invested in the business. If you want to beat the market, a ROE of at least 10% is essential.
An extremely important ratio. Too much debt can cripple a business during tough periods, eventually leading to bankruptcy.
Furthermore, this ratio is a good way to gauge the management’s claims. For instance, they may claim that they are going to double their business by borrowing money from banks. But if the D-E ratio is 2, no bank will extend a loan to the firm. Look for firms with D-E less than 0.5.
Percentage of stocks owned by big institutions such as mutual funds, pension funds, endowments, hedge funds or other large investors.
There are two ways to look at this metric. High institutional ownership means that big analysts are confident about future prospects of the company.
But this also limits upside as the stock is not ‘hidden’ from big players. Around 50% institutional ownership is the sweet spot.
Earnings per share (EPS)
The earnings per share is the portion of a company’s profit dedicated to common stocks. A simple example would be if a company made $100 and had 100 shares outstanding, its EPS would be $1.00. If the company posted a loss of $100, its EPS would be -$1.00. In the simplest terms possible, EPS is a good judge of a company’s profitability.
Price To Book
The price to book ratio simply takes the company’s market price per share and divides it by its book value per share, which is often calculated using the balance sheet. A low price to book, such as something under 1.00, can signify undervaluation.
Step Four – Developing an investment strategy
So you know you want to start buying stocks, you’ve open up your brokerage account and you’ve got some basic stock evaluation methods at your arsenal. Your next step is going to be deciding what kind of investor you’re going to be.
There are three main types of investment strategies out there, and choosing one will depend on your current risk tolerance and goals. Although there are more methods of investing out there, such as forex (which you can learn more about forex here,) we’ll be focusing on investing.
Value investing digs into analyzing the true worth of a company, comparing it to the market price and capitalizing on buying stocks that are below their intrinsic value.
Value investing is one of the more rewarding, yet more challenging ways to buy stocks. It requires extensive research and a deep understanding of company fundamentals and the analysis of company balance sheets, quarterly earnings statements and annual reports.
For the purposes of this article, especially with most people reading this just getting started buying stocks in Canada, I’m going to combine dividend (income) investing and dividend growth investing.
This is probably the most popular investment strategy out there, and it is something new investors looking to learn how to buy stocks in Canada can use quite easily.
Income investing for the most part is investing in companies that provide a dividend, either on a quarterly or monthly basis. Investors seek high yielding, established blue-chip companies to build their wealth through payments received by the company in the form of a dividend.
Investors who want broader exposure yet higher yield might turn to ETFs, which offer investors baskets of stocks. Or, they may even buy REIT ETFs, which give investors high exposure to the real estate sector without actually buying real estate.
Blue-chip companies tend to lag the next type of stock we will be talking about in terms of stock appreciation. But, with what they lack in appreciation they make up for in dividends. A stocks price growing a mere 4-5 percent in a year is nothing to write home about, but combine that with a 4 percent dividend yield, and you have a very healthy 9% return.
A more advanced income strategy, one that beginners looking to start investing in stocks may have to take some time to learn, is dividend growth investing. This investment strategy puts investors in a situation where they are not only seeking solid dividends from a company, but they are looking for consistently growing dividends as well.
Growth investing, which is my favorite investment strategy, focuses on investors finding prospective growth companies that will provide above average market returns. Because these companies do not issue dividends, they tend to spend cash flows and profits on things like acquisitions and expansion. A lot of Canadian growth stocks would be considered small-cap stocks.
Growth investing is one of the riskier investment strategies, especially for beginners just learning how to buy stocks in Canada, but with carefully planned execution and solid experience, it is likely to be the most profitable strategy an individual investor can deploy. If you’re looking for some stocks with extra growth, check out our list of the best Canadian stocks to buy right now.
Step 5 – Developing an investors mentality
As I said at the start of this article, buying stocks in Canada has become ridiculously easy. And with that brings the ability to quickly enter and exit positions without much thought. While most aspiring investors hope to be large scale traders, there is about a 95% chance you’re going to end up with an empty wallet.
Developing an investors mentality when buying stocks is something that takes time. Investing in stocks exposes you to extreme volatility over the short term. New investors often get caught up buying stocks at their peaks and selling stocks at their lows. This is often due to fear and what I call “market noise”
There is one thing for certain though, long term investing will provide extensive wealth. Long term, at least in the case of the stock market, is not one, two, or even five years. It often takes decades to reap the real rewards of the stock market.
You’ve probably heard the term pay yourself first. It is the number one driving force behind being a successful stock investor. Set aside a certain amount of money that you can afford every week, two weeks or even a month and place it into your investment account, and use the following investment strategy to ensure you block our market noise and continue down the path to investing success.
Dollar Cost Averaging
Dollar cost averaging is somewhat of an automated form of buying stocks. When an investor dollar cost averages, they are deciding to set aside an allocated amount toward a particular stock, regardless of the price. This can be every week, month, semi annually or even yearly.
The key to dollar cost averaging when buying stocks is to buy an exact dollar figure of the stock regardless of the price.
So, as an example, you’ve allocated $1000 every two months to stock ABC. The price currently sits at $50 a share. Your first purchase allows you to buy 20 shares.
Over the course of the next two months, the stocks price has dropped to $40. You’ve done your research, the investment thesis on the company hasn’t changed, so you purchase another $1000 in shares.
You’ve now dollar cost averaged your way down in price, as you now own 20 shares from your initial purchase at $50 a share, and 25 shares at $40. You now own 45 total shares for $2000, or an average price of $44.44 a share.
Dollar cost averaging allows you to capitalize on short term market volatility and build growth over the long term. It’s important to keep up with the overall health of the company. If something has changed, especially for the worse, you may want to cease your dollar cost strategy and instead sell your position.
Step 6 – E-mail me with any questions you may have, or comment below
I take pride in teaching new investors how to navigate the stock markets on a daily basis. I’ve answered questions from new investors and taught beginners how to navigate the intricacies of the market that go far beyond this article.
If you have any questions on how to get started buying stocks in Canada that isn’t covered in this guide, simply click here and shoot me an e-mail. I’m usually pretty quick to reply.
Or, if you don’t feel like e-mailing, drop a comment below and I’ll get to it ASAP.
Good luck, and happy investing!