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 how to invest in stocks, you can keep on reading. Not only will you know how to get started investing in Canada and around the world 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
**New For 2020**: Frequently Asked Questions
The stock market really isn’t as daunting as it seems
Once deemed an action only executed by the wealthy, investing in stocks is now easier than it ever was. Gone are the days of ticker tapes feeding out stock prices and orders. Now all an investor needs to do is open an account, click a few buttons and they own stocks.
Stock prices are now available with the click of a button through your discount brokerage or even a popular search engine. There are even ways to easily convert your Canadian dollars to U.S. dollars using Norbert’s Gambit to save a significant portion of fees.
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 online, but with the trouble it takes to purchase them without, you’re going to be much better off to open an account.
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, mutual funds, ETFs or bonds. 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 making your first stock purchase? 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 open an account 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 looking for stocks to invest in?
Well, first things first open a separate tab in your browser. Second, grab our exclusive discount code to get $50 in free commissions (stocktrades50). 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.
Your first stock purchase is an important moment, and it must be well thought out. This is why relying on things like social media for investment advice such as learning what stocks to buy and sell is a mistake. The investors in these groups do not have your best intentions at heart.
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.
There are even ETFs that track a very laser focused set of stocks, like Canadian banking ETFs, which include only the 6 biggest banks in the country.
Obviously with this guide being primarily based on buying stocks online (equities being the proper term) through an online broker, 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 when people are looking to start investing, 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. These investments, especially for those looking to start investing, are fairly complicated.
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.
How to buy stock in the companies you’ve identified
With Questrade, the execution of a trade is as simple as a click of a button. whether you’re purchasing mutual funds, ETFs or stocks.
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 with your online broker, 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. Online brokers will list the total “volume” of a stock, which is how many shares are traded on a daily basis.
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, and online brokers won’t execute the trade until the order is satisfied.
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 online 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. Most online brokers these days have interfaces that are very easy to use in terms of order types.
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.
Failure to execute a step like this could mean paying for stocks that are ridiculously overpriced, much like new investors did with Canadian weed stocks in 2019. Most were taking speculative investment advice from investors who had positions in these companies and were looking to “pump” the stocks up.
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. Online brokers will typically offer all of these metrics when you look up a company ticker. But if you can’t find them, head to a place like Yahoo Finance or Reuters.
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 markets, 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 EPS 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 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 opened 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 trade below their intrinsic value.
Value investing is one of the more rewarding, yet more challenging ways to trade 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 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 trade seeking 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 trade ETFs, which offer investors baskets of stocks. Or, they may even trade 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 looking to trade stocks with solid dividends, 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, and may be in young industries like 5G or renewable energy.
Growth investing is one of the riskier investment strategies, especially for beginners just learning how to buy stocks online 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 to trade 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, learning to trade stocks in Canada has become ridiculously easy. And with that brings the ability to trade in and out of 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!
**New For 2020** – Frequently asked questions
As more and more people come to us for investment advice, whether it be trading online, opening up a brokerage account or learning how to evaluate stocks, we get somewhat overwhelmed at the amount of e-mails.
As such, we’ve decided to add a FAQ with your most popular questions when it comes to learning how to trade online.
How much money do you need to buy a stock?
Realistically, you only need the amount you’re looking to buy the stock for, plus brokerage commission costs. For example, if a stock is trading at $20 and your brokerage charges a $5 commission, you’d need $25 to trade the stock.
However, you can probably see the downside of this. First off, a $20 stock is costing you $25. Nearly a quarter of your purchase price is gone in commission. This is an impossible rate to keep up with and become profitable.
Therefore, we suggest that your commissions make up no more than 1% of your trade. So, a $5 commission would mean you only trade the stock if you have $500 minimum.
This isn’t always the case, as online brokerages are coming out with free commission platforms. In this case, all you’d need is simply the brokerages account minimum balance. Which, for a company like Questrade, is $1000.
How can I start investing with little money?
Investing online with a small amount of money can seem somewhat cumbersome. It seems like whatever you do, people around you are earning more. However, it’s important to stick with it. You can start investing today with a very little amount of money.
Like we said above, Questrade offers account minimums of only $1000. Prior to online brokerages taking over the scene, commission costs were in the $40-$50 range. This made it impossible for new investors with little money to invest. A purchase and sale of a stock would cost you $100 (commission on both ends) and most small time investors would have earnings eaten away in commissions.
Now, with online commissions being very minuscule, or even free in some cases like we mentioned above, investing online with little money is as simple as opening up a brokerage account and getting started.
The best time to invest is now. $1000 invested in an account today earning 8% would leave you with $10,175 in 30 years. Doesn’t seem like much, but if you keep contributing, your investment account will grow rapidly.
Which stock trading site is best for beginners?
In our eyes, the absolute best online stock trading site for beginners is Questrade. This isn’t coming from a pushy affiliate perspective either. I (Dan) have had an account with Questrade for the last decade, and they helped me immensely when I was a beginner.
Whether it’s their free online courses, excellent customer support or their best in class online trading platforms like IQ Edge, it’s an absolute no brainer to me that Questrade is best in class for new investors looking to trade.
Did we also mention they have some of the lowest commissions? If you’re interested in opening an account, grab $50 in free trades here.
Where can I buy stocks online?
There are a few ways you can buy stocks online. One of them would be through a discount brokerage like Questrade, RBC Direct Investing or Interactive Brokers. However, there are other ways of purchasing stocks online.
Some company’s offer direct stock purchase plans online. With direct stock purchases, you can get a discount on share price, save on commission costs and even enroll in the company’s DRIP program. However, these opportunities are extremely rare nowadays and most investors are going to be better of simply opening an online brokerage account and trading from there.
However, it definitely doesn’t hurt to try and search out your favorite companies and see if they have direct purchase.
What is the best brokerage in terms of fees?
In terms of commission fees, the best brokerage here in Canada is Interactive Brokers. Interactive Brokers fees are $0.01 a share, with minimum fees being $1. It is very important you understand how most brokerage fees work, as many advertise lower commissions than they are actually charging.
For example, the Interactive Broker fees state $0.01 a share, but a dollar minimum. This means if you purchase 50 shares of a stock, you’ll still be charged $1. This works the same with Questrade, who’s fees are $0.01 a share and a minimum of $4.95.
Now, before you automatically assume that Interactive Brokers is the better brokerage to open an account at because of lower fees, keep in mind the account minimums are different. Also, inactivity fees will need to be taken into account, as Interactive Brokers charges these fees more often than other discount brokerages.
Keep in mind, when you’re purchasing a mutual fund or an ETF, there will also be management fees on top of commission. However, some brokerages like Questrade offer free purchases of a mutual fund or ETF, meaning you may only have to pay when you sell.